If you’re starting or expanding a business, several factors need to come together to make it happen. Market research, developing or improving your products and services, marketing, and staying on top of changes in your industry are essential. At the same time, you need funding to support your ambitions. For most entrepreneurs, that means obtaining a business loan. Understanding which factors lenders consider when evaluating borrowers’ creditworthiness will help improve your chances of getting the money you need to foster your company.
Your Business Plan
For one, lenders generally want to see potential borrowers’ business plans before providing Loans. If you have a solid business plan, that shows lenders you’ve put serious thought into your company and how to spend the money they give you. It also speaks to your chances of success, which will affect your ability to repay the loan. That, in turn, greatly reduces the risks involved for lenders, so they’ll be more likely to give you the money you need to put into the business.
Your Credit History
Another factor lenders consider is credit history. That could include both your business’s borrowing history as well as your personal credit reports. Having a good credit score and a track record of paying your bills on time could improve your creditworthiness. Those aspects give lenders greater confidence that you’ll repay the loan. Again, it reduces the risks and potential losses involved for them. Having a low credit score or no borrowing history may not disqualify you for a business loan, but it could affect your interest rates and the amount of money you’re eligible to borrow.
The Business’s Cash Flow
Lenders also look at the cash flow of a business when determining loan eligibility. They’ll look at the company’s income, balance sheets, and other documents to ensure there’s actually enough money coming in to repay a loan. For startups, they may look at projected cash flow instead since those companies can’t yet provide solid proof of their income. In those cases, having a well-thought-out business plan is particularly important.
Debt-to-Income Ratio
Your company’s debt-to-income ratio will also be important when deciding if you qualify for a business loan. Lenders generally want to see definitive proof of the amount of money a company is paying out versus the amount that’s coming in. That helps them decide if a potential borrower can afford to repay a loan without causing undue financial hardship. They consider factors like utility bills, rent or lease payments, existing loans, payroll, and other ongoing expenses and weigh those against the money prospects are bringing in.
Getting the Money Your Business Needs to Succeed
Those are some of the common factor’s lenders consider when determining if a business qualifies for a loan. They may also look at your industry and its potential for growth, your management experience, and exactly how you plan to spend the money. Some lenders are more stringent than others, and certain loan companies are more willing to work with borrowers who have little to no credit history. Consider researching potential lenders before committing to a business loan. Be sure to have a business plan and all your financials in order before applying for a loan as well to improve your chances of being approved.
