Many businesses enter the small business loan process unprepared for the close examination they could experience while looking for a small business loan, even though different lenders will examine your small business creditworthiness using different metrics.
A business’ financials are the most objective way to evaluate the health of a business. As the old saying, “numbers don’t lie.” Numbers can suggest prosperity or scarcity; however they also can show the primary signs of issues within a company. To help you understand what the numbers try to tell you, we’ll discover five identifiable hidden risks that can serve as trouble indicators to you when reviewing your financials.
- No Revenue
Despite the fact that the revenue threshold will range based on the lender, for instance an online lender would possibly work with a small business that has $100,000 in annual revenue while a more traditional lender would opt to work with a business with revenues closer to $1 million, in case your small business isn’t generating any revenue yet, it is unlikely you will find much success with a lender.
- Spotty Cash Flow
A trend among lenders at present along with online lenders is a more frequent episodic payment as compared to monthly. Daily or weekly direct debits from a business checking account are becoming more common. But, to effectively do this, a small business requires the right type of cash flow. A stable cash flow into the business on a daily basis is best suited to the more frequent episodic payments and can be less complicated for the small business to accommodate as compared to a bigger payment due at the month end.
This makes it difficult for small businesses in that first year or two to qualify for a small business loan. However that doesn’t suggest that there are no credit options available to them. Vendors regularly provide credit to their good customers. Other businesses that offer many of the supplies most businesses use on a regular basis additionally provide credit to small businesses. And, as they report to the credit bureaus about your good credit behavior, they will assist you in building a business credit profile that will make it much easier to get a small business loan.
- No Track Record
Lenders are typically looking to make a prediction about what you’ll do in the future by looking at what you’ve done in the past, when you have no history—in other terms, you’ve got a weak business credit profile—it is a warning signal. This is also why time in business is applicable. However, some lenders will work with more young companies. Many online lenders require a year under your belt, while most traditional lenders will need to see several years. Alternatively, the SBA will work with a startup business given the owner has a great personal credit rating and other business metrics in place. This will likely encompass adequate cash flow and revenue to make the loan payments.
- Weak Credit Profile
Your business credit profile is a mirrored image of how your business meets its credit obligations and there are some reasons your business might have a weak profile. It is viable that you simply haven’t been in business long enough to build a robust profile. It is also feasible you haven’t taken advantage of opportunities to build business credit in the starting by searching for trade relationships along with your vendors or getting a business credit card—building a profile requires sensible use of business credit. To build a strong business credit profile, you should avoid the use of personal credit for business purposes. The usage of personal credit score does not help build your business credit profile.
- Low Personal Credit Score
Even though your personal credit score is a mirrored image of how you meet your personal credit obligations and not your business obligations, it has become a standard metric that many lenders use to evaluate your business creditworthiness. It has even become a deciding factor for traditional lenders—so a personal credit rating below 680 will make it difficult to get a loan from the traditional lender. The SBA will sometimes pass as low as 650, and many online lenders will work with a business owner with a lower personal credit score, given that they can validate a healthy and creditworthy business.
Getting capital for small business is a challenge for lots of small business owners; however being aware about potential hidden risks to your small business can help resolve them and improve the chances of a successful small business loan application in the future.