06.22.20165 min read

What Lenders Look for During Your Business Loan Application Process

by Meredith Wood 

If you’re like most small business owners, you probably find yourself constantly crunched for time. After all, you’re busy, you know, running your business. So when it comes time to apply for a small business loan, you may have the urge to slap everything together and hand it over to your lenders as quickly as possible. 

But wait—remember there are certain requirements that need to be met in order to actually get approved for the business loan you need. If you don’t meet those requirements, putting together the application will turn out to be a total waste of time.

If you need to apply for financing in a hurry but want to have the best possible chance of approval, focus on these four factors that will impact your loan application the most.

Time in business

The stark reality is that 50 percent of businesses fail within the first five years of operation. Lenders know this, so they’re usually wary of brand new business with little credit history or track record of sound financial management.

Generally, your first year of business is going to be the hardest to secure financing. After you get over the first year hump, you’re likely to have a few more options. But typically businesses that have been around for more than two years are known to be the most fundable. 

This is not to say that there no startup financing options available, but the greener your business is, the more of a risk it is for lenders to approve your loan application. Unfortunately, there’s nothing you can do about this factor except wait to apply for a loan when you have a little more time under your belt.

Annual revenue

Lenders know that if your business isn’t making money, it will be pretty much impossible for you to make regular loan payments. And of course, owning and operating a business comes with monthly expenses that eat into the profitability of a business.

Before approving your loan, lenders will look into the financials of your company to see that you have enough money to cover both your operating expenses and your loan payments. The general rule of thumb is to limit your total loan amount to less than 12 percent of your company’s total revenue. This way, even if emergencies do arise, you should still have enough cash on hand to make your loan payments.

Average bank balance 

Even if you’re pulling in enough revenue to cover operating expenses and future loan payments, lenders know that unexpected expenses come up in business. If every dollar that comes into your business goes to operating expenses and loan payments, it doesn’t leave you any wiggle room should you get a bad batch of inventory, or find you need to replace an important piece of equipment. 

Because of this, your lender will also expect you to have some form of cash cushion in your bank account to cover the unexpected without getting behind on your loan payment.

To better appeal to lenders, aim to have three months worth of expenses saved. If that goal seems out of reach, start with a padding of at least $1,000. But remember—the more cash on hand you have, the more appealing your loan application will be.

Personal credit score 

Even though the loan is for your business, one of the main things a lender will look at on your loan application is your personal credit score. Since the lender is handing the money to you, the business owner, they want to make sure you’re responsible with your own finances. 

Before you apply for a loan, pull your credit report from the three major reporting agencies (Experian, Equifax, and TransUnion). For online lenders, a score of 700 is considered excellent, and 600 is considered average. If your score is anywhere below 600, take steps to improve your credit score before sending in your loan application. 

You can quickly improve your credit score by removing any errors on your report, paying down your balances, and increasing your credit limit (without increasing your spending). 

Other factors

Of course, these are not the only factors a lender will consider when deciding whether or not to approve or deny your loan application. Lenders also want to see a well-thought-out business plan, your business credit history, among other things. But if you’re pressed for time and have to prioritize, focus on these factors to give yourself the best chance of qualifying for your small business loan.

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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. She 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. 

 

 

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