What Do Business Lenders Look For In Your Application?
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CEO and Founder of National Business Capital, a leading FinTech marketplace offering streamlined small business loans.
Small-business loans can help you expand your business, purchase equipment or fund everyday business operations. But if you’ve ever applied for a Small Business Administration (SBA) or small-business loan, you know that there’s quite a bit of work involved.
Once you’ve determined the type of loan that’s best for your business and how much money you need, you’ll find a lender that aligns with your business, explain to them why you need funding through an application and gather all the required documentation.
It seems straightforward, but peeling back the onion of business financing reveals some unique insights into how lenders consider your application. By understanding this process, you’ll improve your chances of success.
What Lenders Look For In Your Business Loan Application
Most lenders consider the same criteria when evaluating your company for a business loan. Lenders want to see that your business has a history of repaying its debts, enough cash flow to repay the loan and long-term growth potential. They’ll also consider market conditions.
1. Credit History
Your personal and business credit history shows whether you have a history of paying your bills on time and repaying your debt. It helps your lender determine how likely you are to repay the loan.
Make sure to check your personal and business credit report before applying for a loan. Doing this will help you get a sense of where you stand and give you a chance to check for any inaccuracies in your report.
You can request a free copy of your personal credit report from the three major bureaus at AnnualCreditReport.com.
2. Cash Flow
Your business’s free cash flow is one of the most important factors influencing whether you can obtain business financing. Cash flow includes the money your business generates in sales and cash from investments or other financial activities.
Adequate cash flow demonstrates that your business can cover its monthly loan payments. Your lender will want to see that your business is making consistent deposits into a business bank account. You can improve cash flow by paying off or refinancing existing debt, reducing inventory or collecting on overdue accounts receivables.
3. Capital
In addition to cash flow, your lender will consider any capital or assets your business owns. For example, lenders like to see that businesses have access to real estate, stock options, inventory or other items that can be used as collateral to secure the loan.
If you’re applying for a large loan, some lenders may require you to put down collateral. Collateral gives your lender additional assurance that you’re not going to walk away without repaying the loan.
4. Market Conditions
Market conditions are another consideration when lenders are evaluating your business. For example, a lender will look at the current economic conditions, the state of the industry your business is operating in and competition from similar companies. If you can show your lender that your business is well-positioned for future growth, you increase your likelihood of receiving a small-business loan.
Requirements For Bank Versus Non-Bank Lenders
The process of applying for a small-business loan can vary depending on whether you apply with a bank or non-bank lender. Here’s how the requirements can vary between the two.
Credit
Having a strong personal and business credit score is the best way to qualify for the lowest rates and terms on your loan. Most banks will look for a FICO score above 700, and if your score falls below 680, you may have a hard time qualifying.
In comparison, non-bank lenders have more lenient credit requirements and may be able to work with borrowers with scores that fall below 650. Just look for other ways to demonstrate that your business can repay the loan.
Requirements
When you apply for a bank loan, you should expect a more rigorous application process. Banks may require documentation like a business plan, financial statements and your company’s articles of incorporation. If your business isn’t well-established, a bank may require a personal guarantee or some type of collateral.
Non-bank lenders typically require less documentation and may be more willing to work with startups. The collateral requirements will vary depending on the lender you work with—some will ask for collateral or a personal guarantee, and some won’t.
Funding Time
Because of the rigorous application requirements, it can take several weeks or months for your loan to be approved. A bank loan may not be the best option if you need access to the funds immediately. However, some non-bank lenders offer a more streamlined application process, and you could receive the funds in just a few days.
Applying for a small-business loan from a bank has many advantages. Still, non-bank lenders have become an increasingly competitive option as banks continue to tighten their standards and have considerably slowed down on lending. Speaking from my experience in the small-business loan industry, they can be fast and flexible, and they’re funding many businesses under the current market conditions.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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