Is your small business getting bigger, but you need more capital? Many small business owners would argue this is a good problem to have — right? However, for entrepreneurs looking to start or grow a small business, applying for funding can be the most daunting part of the process.
You’re not alone if you feel this way. Many small business owners are overwhelmed with trying to choose between various borrowing options, and uncertain if any lenders would be willing to fund their small business loan.
Whether you’ve applied for a traditional bank loan, or you’re seeking an alternative source of funds, ultimately, lenders just want to know that you’ll be able to meet the terms of the borrowing agreement and pay back the loan on time.
Not sure whether your business fits the bill? Here are six criteria lenders commonly focus on when deciding if you’re a fundable borrower:
1) Personal Credit Score
For most lenders, your credit score will be the first factor considered in determining your eligibility for a loan. A credit score of 650 and above is considered good — and if you’re in the 700’s you’re in great shape.
If, however, your personal credit score is under 620, it could negatively impact your ability to secure a loan. So be sure you’re taking steps to improve your credit score, including monitoring all credit reports for potentially false information.
2) Age of Your Business
Brand new businesses can often have a tougher time getting funding, simply because there’s little to no revenue history to demonstrate the viability of your business model. Lenders are more likely to fund your business if it’s at least a year old. And if your business is over two years old with a good revenue history, that’s a great sign of your overall fundability.
3) Annual Revenue of Your Business
If your business is old enough to have an established revenue history, lenders will want to see that you’ve been making money. After all, if there’s no income, how will you pay back your loan?
An annual revenue of $250,000 is considered a good sign for funding — $500,000 is great. While having revenue of less than $250,000 will not result in an automatic decline, it will limit your options. Overall, the annual revenue lenders will expect depends on the size of the loan request.
3) Average Bank Balance
Even if your annual revenue is fantastic, every business goes through ups and downs. That’s why lenders prefer you to have some cash on hand — a cushion that proves you’ll be able to keep up payments even if sales are down.
An average bank balance of $5,000 is a good sign, $10,000 is even better. Of course, as with your annual revenue, the larger your loan, the more cash on hand lenders could potentially require.
5) Available Collateral
In spite of best intentions, not all businesses succeed. That’s why most lenders require some type of collateral to ensure that in the event of financial struggle, you have a second source of loan repayment. Potential sources of collateral include business assets such as equipment, real estate, accounts receivable, and inventory — as well as personal assets such as your home or other property.
6) Debt Repayment History
Finally, one of the best indicators of your likelihood to repay a new loan is your debt repayment history. Being able to show evidence that you’ve always paid past credit cards, mortgages, or other loans on time is a great sign for lenders that you will do the same with your small business loan. Keep in mind, not all of your debt repayment history will necessarily show up on your credit report — the more information you can give lenders about your history as a responsible borrower, the better.
It’s important to remember that in the world of small business lending, there are no guarantees. The weight of the various factors being considered varies from lender to lender, and it can be impossible to predict what exactly will guarantee a funded loan. The better your numbers are in every area, the more likely you are to be a fundable borrower with your choice of loan options.
Even if your business doesn’t qualify for a traditional bank or SBA loan, there may be other loan options that are a better fit for your situation. With the growth of alternative lending, there’s a variety of lenders and loan types to fit the needs of more small businesses than ever before. So be persistent, and take the time to consult with a small business funding specialist to consider all of your borrowing options.
About the author:
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.
The information and tips we’re sharing in this article are meant to be a starting point for your year-end tax prep, so you can be informed and feel confident when working with your accountant. Be sure to check with a tax expert in your country or region for any specific advice you need, as each business (and tax district) is different. As our lawyers would say: “This article is for informational purposes only. It should not be considered legal or financial advice.”