Securing a business loan can feel like navigating a complex maze, but at its core, lenders are looking for assurance: assurance that your business is stable, capable of generating sufficient cash flow, and ultimately, able to repay the funds. They act as careful stewards of their capital, so their assessment revolves around minimizing risk. From the strength of your financial statements and credit history to the viability of your business model and even your commitment, a solid loan application strategically addresses these key areas to demonstrate your business’s creditworthiness and its potential for success. Here is what lenders look for in a small business loan application.
Your Credit Matters
Most lenders want to know your credit history and score. It lets them know if you’re able to repay the loan they give you. Visit AnnualCreditReport.com and obtain reports from these credit bureaus: Experian, TransUnion, and Equifax. Write dispute letters to these bureaus if you see errors. You may need to mail copies of documents to prove your claim. If there are errors, the bureaus must remove them within 30 days.
They’re Interested in Your Cash Flow
Lenders are also interested in the revenue your business earns annually. Present your most updated and accurate cash flow statements from your business. They may also ask for your most recent bank transactions to verify the information on your cash flow statement. The cash flow statement should include revenue from sales, while the outflow section includes your business expenses, such as wages and operating costs. The next aspect of the cash flow statement should include all funds you received through investments. Finally, the statement will have a section for money you owe to others.
Do You Have Collateral?
When you fill out a small business loan application, the lender may ask if you have collateral. Lenders want this information because they want to reduce their risk should you fail to repay the loan. If you don’t repay the business loan, the lender can take your collateral to recoup losses. Examples of collateral include vehicles, equipment, machinery, fine art, jewelry, and real estate.
What Is Your Plan For the Business?
Lenders don’t like to lend money to entrepreneurs who don’t have plan for their businesses. It’s wise to present a detailed business plan that discusses your goals for the business and what your company is about. Start the business plan with an executive summary that lets lenders know the details about your company. You’ll also discuss your products and services, and who will be on your team as your core staff members. Include market research you’ve done on your products and discuss your projected sales goals.
Length of Time You’ve Been in Business
Lenders also consider the length of time you’ve been in business. Many traditional lenders want you to have been in business for two years, while some online lenders prefer that you’ve had your business for six months. If you’re just starting, you’ll have a harder time securing a business loan.
Are You Financially Invested in Your Business?
The purpose of a business loan is to assist you in funding your business needs. These loans generally don’t cover the entire amount needed for your business. This is why lenders want to know if you’ve already invested some of your resources into the business. In your business plan, discuss how you’re contributing some of your capital to the business.
Debt-to-Income Ratio
Lenders also want to know if you have high levels of debt because if so, they’re less likely to give you a loan. Calculate your debt-to-income ratio by dividing your monthly expenses by your gross annual income. It is also wise to pay off some of your outstanding debts before applying for a small business loan.
How Will You Use the Loan?
One reason why lenders want to see your cash flow statement and business plan is that they want to know how you will use the funds to grow your business. Your business plan should include specific reasons for getting the loan. If you need the loan to open a new location in a nearby city, discuss it in the plan. Discuss the details of your current business budget. For example, you may mention how you plan to promote the business with local TV advertising, radio advertising, and social media marketing. If you plan to use the funds to buy equipment, state how the equipment will help your business run efficiently. Give a realistic timeline for the goals you want to achieve with the funds. Discuss any potential risks and how you plan to minimize or prevent them.
Business Insurance
Depending on how high-risk your business is, many lenders want you to have business insurance. Business insurance protects you from damage to your business from theft, natural disasters, or other situations that might result in the loss of your business. Lenders also want business insurance because when you have supplemental funds, it ensures your ability to repay the loan and continue operations.
How Lenders Evaluate Your Bank Statements
Lenders look at your bank statements to determine if you’ll get the loan. If there are excess overdrafts, this is a red flag, and lenders will wonder if you can repay the loan. Large and unusual transactions may require an explanation to the lender. If the lender sees frequent short-term loans or excessive credit card charges on your bank statements, this is also problematic for lenders.
About Alternative and Online Lenders
If you were denied a business loan by a traditional bank, you have other options. Online banks offer business loans with less stringent credit requirements, and you’ll receive the funds in a fraction of the time it would take for traditional banks. A drawback of using online loans is that you’ll pay higher interest rates. The repayment terms may be shorter. Another option is to borrow from relatives. Get the agreement in writing with the relative who lends you the money, and make timely payments to avoid conflict with the relative.
Securing a business loan hinges on demonstrating to lenders that your business is a reliable and capable borrower. While the specific requirements may vary between different types of lenders, the core assessment revolves around a comprehensive evaluation of your business’s financial health, operational stability, and creditworthiness.