No matter what type of business loan you apply for—whether it’s an unsecured personal loan from a bank, a line of credit from a credit union or a merchant cash advance from an alternative lender—there are 4 critical questions that you should be answering to every lender.
- How much time you have been in business?
The more, the better applies to this. According to a study, almost 50% of small businesses fail in their first five years of operations. This failure can be from a lack of adequate capital, bad management, faulty planning, excessive budgeting or cash flow problems. If you’ve played the odds, lenders will be anticipating you’re on the right track and that your business will be operating long enough to repay the loan.
On the contrary, if you haven’t been in business for that long, turn over to alternative financing or secure funding with your personal credit. Initially, if you’re able to sustain without financing, the best is to preserve. Once you have the ample time in business, you can gain lenders trust and they’ll be willing to run the risk on you. The key here is to stay afloat until you hit the 5-years mark, and avoid taking too much debt by working on improving your credit scores.
- How much money your business earn and save?
Knowing your business revenues and profits is the second most crucial information every lender wants to have. They want to see how much money your business is generating and the Net profits you actually keep. It is common practice to share your full financial profile, including credit history, income and assets while applying for business loans.
With a good stream of business income, you’ll less likely to be viewed as a risk to the lender. On the contrary, a high income doesn’t mean you can get better rate if your fixed expenses are high.
- How healthy is your cash flow management?
For every lender, it starts with the numbers. By numbers, we mean your business cash flow. It’s the key to any successful business. A business cash flow statements demonstrate lenders how much money is available to your business at any given time. Lenders want to see how well your business is managing cash flow by reviewing financial statements and average bank balances. Even a moneymaking business can struggle with cash flow issues.
A healthy cash flow demonstrates potential lenders that your business has the capacity to cover the costs of any financial obligations, along with the cost of a new loan. In simple words, if the cash flow calculations specify your business unhealthy, you don’t have a deal—being it the primary reason of loan denials.
However, it doesn’t mean you won’t be able to secure a business loan. Use your business plan to describe your loan repayment plans, whether it be from revenues growth, earnings, or from debt refinancing, and so on.
- What is your debt repayment history?
Most of all, lenders want to get paid. Which is why a debt repayment history is of particular importance for the lenders. Moreover, payment history constitutes 35% of the FICO score of potential borrower’s, No lender want to loan money to someone with unsatisfactory commitment to repaying debts.
Late payments, missed payments, outstanding debts defaults, and bankruptcy are all red flags to lenders. It’s a contradiction, but, the less debt you owe, the better your chances of getting loan. When securing business financing, your personal credit score really matters.
When you don’t have a 5-years’ time in business, your personal credit score is all a lender has to concludes your creditworthiness. Even if you’ve little time in business with a decent business credit score and solid personal credit score, your personal credit score serves as a reflection of your overall “creditworthiness” for the lender.
Generally, a personal credit score of 780+ is excellent, and a credit score of 661 to 780 is very good with 601 to 660 as fair credit score.
However, it doesn’t mean you need a solid credit rating to secure a business loans. In fact, most small businesses who secure funding through Merchant Advisors has an average credit score of 600 to 660. Nonetheless, the higher your credit score is, the more business financing options you’ll be able to qualify for at lower interest rates and desirable terms.