5 Important Factors that Could Impact Your Chances of Qualifying for a Loan
Make sure you can secure financing when you need it. Consider these credit factors that could have considerable impact on your business.
Financing is the lifeblood of small business, and the more you know about what lenders are looking for from borrowers, the better your chances of securing financing when you need it. Let’s consider five factors that can have considerable impact on your chances of getting the right financing at the right time.
1. Credit Scores
Your credit score is often the most important factor when it comes to qualifying for a small business loan.
Thanks to the rise of alternative lending, small businesses have more financing choices than ever. Even entrepreneurs with bad credit scores can hope to find financing through options like certain business credit cards, micro loans, and merchant cash advances. These usually come at a cost, however, with high interest rates and shorter repayment periods.
Borrowers with good credit scores have a wider range of choices, with terms more favorable to long-term success.
To qualify for the best financing for your business, strong personal credit scores are generally a must, but did you know that your small business has a business credit score as well? Building up your business credit score will help legitimize your business in the eyes of banks and lenders, simplify your taxes, and open doors to trusting relationships with vendors and suppliers.
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2. Cash Flow
Cash flow is defined as the total amount of money coming into and going out of your business. Lenders are not only interested in how much money you’re making, they also want to see (a) how you reinvest it back into your business, and (b) if you’re able to maintain cash reserves for a rainy day, versus spending it as soon as it comes in.
Maintaining a reserve of cash is important because it shows your lender that you’re smart about money and can be counted on to make timely payments on your loan until it’s paid in full.
When applying for a commercial loan, banks usually want to see documentation for at least three months’ worth of your operating expenses. These should include any and all loan payments. If you’re new to business, prepare to show all of the statements you have available, because the more information you can share, the better the likelihood of getting a loan.
Qualification requirements for alternative lenders differ according to lender, but they’re generally less exhaustive than those required by commercial loans, with a quicker turnaround time. Invest the time you save on compiling documentation into carefully researching the terms and conditions, pluses and minuses for each non-traditional source of financing you consider.
3. Time in Business
According to the U.S. Small Business Administration, about half of all new small businesses survive five years or more, while about one-third will make it 10 years. A full third of small businesses fail within two years of their grand opening.
Traditional lenders keep a close eye on these numbers, and place a high value on the length of time your business has been up and running. It differs according to lender, but the minimum sweet spot for both traditional and alternative lending is usually around a year. Some alternative lenders require as little as six months, but less stringent requirements usually come at a cost—you’ll want to make sure you’re able to repay the loan quickly, otherwise the higher interest rates may hurt your business’ cash flow.
For new businesses looking for breathing room, business credit cards are a great source of early financing. You can apply for a business credit card as soon as you get an EIN (federal tax identification number), but remember that strong personal credit scores will play a big role in the outcome.
Collateral is a personal or business asset that you put up as security for the repayment of a loan. It can be a useful tool when applying for business financing, because there are different types of loans for different types of collateral.
Collateral can include deposits on a merchant processing or business bank account (a good option for new business owners), home equity, and business-owned equipment. Collateral is a strong motivator for paying your bills on time, but think long and hard before considering it an option. If you can’t repay the loan, the bank will take your assets to make up for its loss.
5. Social Media
Social media can be an excellent tool for reaching customers and establishing a brand, but the role it can play in obtaining financing isn’t always as obvious.
Although many banks have yet to consider social media a factor for the financial success of your business, a number of credit unions and alternative lenders like Kabbage and LendUp are looking to social media to see how favorably a business is viewed online, whether it’s trusted by its customers, and the extent to which it’s considered an authority by both customers and peers.
The importance of social media to financing will only grow as more and more consumers take advantage of the convenience of shopping online. Consider starting a blog about subjects applicable to your industry, keep your social profile up to date, and stay connected on forums like LinkedIn, Twitter and Facebook.
Master these skills before you need them for financing, and your hand will be that much stronger when approaching lenders in the future.
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