To successfully apply for a business loan, here are the most important requirements you need to meet to maximise your chances of getting approved.
In this article:
- Debt and liabilities
- Business age
- Cash flow
Some lenders may be more adverse to certain industries than others when deciding whether to approve your business for a loan. Some business may be considered riskier than others - businesses deemed to be socially undesirable / have an unsteady cash flow are more likely to be rejected than others. Many lenders for example won’t offer loans to businesses in the adult entertainment, marijuana or gambling industries.
If your business is seasonal, e.g. a golf course, ski clothing company or ice cream truck, it's likely you already understand the importance of a strong positive cash flow to sustain your company during the off season. Given the ups and downs of these types of businesses, getting approved for a business loan may prove also difficult.
The better your credit score, the more likely you’ll receive a lower rate on a loan. Lenders tend to look at both personal and business credit scores and history, and because most SMEs don’t have business credit, personal credit is crucial. In many cases, you’ll need a credit score of at least 600 to acquire a business loan.
3. Debt and liabilities
Lenders look at debt-to-income ratio to measure the percentage of your monthly debt payments against your monthly gross income, with most lenders requiring a debt-to-income ratio of 50% or lower. As you may have guessed, SME lenders are wary about lending to borrowers who already have other loans.
As well as debt-to-income ratio, lenders will almost certainly want to see a balance sheet. This is a basic document that summarises your business’s financial health, including assets, liabilities and equity. Your total assets should equal the sum of all your liabilities and equity accounts. Your balance sheet helps determine if you can spend to grow or if you should save cash for a rainy day. Maintaining an accurate balance sheet is a crucial task for every business.
To make your personal profile stronger, keep a low balance on credit cards and lines of credit (usually around 10% per account). A high credit card balance not only negatively impacts your credit score, but also affects your personal financial health.
Lenders usually require a personal guarantee from business owners. Even if you have an LLC or a C corporation, the lender can pursue you personally if you can’t repay the loan. It’s important to note that not all debt is equal; commercial real estate, business acquisition loans, lines of credit, and merchant cash advances all hold different weights with the lender. If your debt is backed by assets you're much more likely to be approved, regardless what kind of debt you have.
4. Business age
With around 20% of businesses failing within their 1st year, it’s no wonder most lenders require a minimum business age from borrowers. In the majority of cases, this can range from six months to two years. Keep in mind that lenders also look at how long the business bank accounts have been open, not necessarily just how long the entity has been registered.
Without at least two years of business history, you're unlikely to get approval from traditional lenders and banks. But have no fear—there are a variety of alternative online lenders that have more relaxed approval processes than traditional lenders, which makes them much more viable options for start up businesses.
Collateral refers to tangible assets owned by the business or business owner. For a loan approval, lenders may require collateral such as invoices, equipment, real estate, and businesses.
Some lenders require borrowers to pledge both business and personal assets to secure a business loan, which we understand isn't ideal for startups in particular. The good news is some business loans don’t require any collateral, with certain business loan companies offering flexible term options that are generally easy and straightforward to qualify for.
6. Cash Flow
Cash flow will make or break a business, and a steady stream of cash shows lenders that you’re capable of sustaining the loan payments. It represents your business’s health and as well as income, lenders will most likely look at expenses to determine how profitable your business is.
If your company regularly deals with invoices, it's likely that you've experienced the issues associated with delayed payments. Fortunately, there’s a valuable financing option for business owners which we also offer at Novuna Business Cash Flow. Invoice financing offers a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.