Ready to check your business loan eligibility? This engaging guide unpacks the five key areas lenders scrutinize. Find out where you stand now.
Within your reach is the ingenious concept, the one that lets you daydream while doodling, and plotting your empire on napkins. However, sirens might start going off once you hit reality– there is one roadblock and one roadblock only: cash. Enter the powerful business loan. But before you have night terrors about emotionless bankers, allow me to unwind the suspense. The real first step is not to submit application after application; it is scratching your head understanding the prerequisites to get a business loan. To borrow a sports analogy, we are speaking about warmups, the head-clearing, and the organization part of the process. There is no terrifying test to pass, and understanding the “code business” spoken by lenders is the terrifying part of the process that once mastered, allows you to sail through the rest. Trust me, it makes a world of difference.
The Big Five: Steps That Evaluate Your Business Loan Eligibility
Exploring different avenues of business financing can be as challenging as solving a Rubik’s Cube on a dark. It can be quite perplexing! Still, a lender uses very few core components to make a decision. For any business, the only question they will ask is, “Is this a good bet?” Let’s uncover the details that they use to help make their decision, that way you can properly assess your business loan eligibility.
The most important monetary document to a lender tends to be your credit score.
The first step is always the most important, and in this case the most important step is your credit score. For a new business, personal credit score is always the first thing a lender considers. Why? Because it’s a direct reflection of your debt history. Do you pay your bills on time? Do you manage your credit responsibly? A score above 680 is generally a good starting point, but the higher, the better.
But hold on, there’s a little more! If you have been operating a business, you probably have a business credit score as well. This score functions similarly to a personal credit score, but it’s associated with your business’s Employer Identification Number (EIN). Rest assured, lenders will look into both. So, go check your credit reports (remember, you can access them for free once a year!) and check your standing. Are there any unexpected results or discrepancies? Correct them, and do it well in advance of applying. This simple check is important for assessing your business loan eligibility to receive a loan.
Time in Business: Are You a Veteran or Just Starting Out?
Imagine this: two chefs seeking funding. One operates a successful food truck for three years, while the other is a recent culinary school graduate with a brilliant restaurant concept. Based on this, which is the safer bet? Well, lenders operate on the same logic. Most traditional banks and SBA lenders prefer a minimum of two years of operational history. This history helps demonstrate that your business model isn’t a fleeting concept and provides sufficient evidence that the business has sustainable potential.
Does this spell trouble for startups? Not in the slightest – the rules of the game have simply changed. For new ventures, their personal credit and business plan will be key, along with alternative lenders or microloans. Knowing the age of your business helps in assessing whether you qualify for a business loan from a certain institution.
Annual Revenue: Show Me The Money!
Cash flow is king. Period. Traditional lenders want to see a consistent and predictable stream of cash flow coming into your accounts. Think of it this way: a financial heartbeat that indicates your business is not merely surviving, but actively “thriving.” Proving income with bank statements and tax returns is very common for traditional lenders. There is a common benchmark for many lenders to look for at least $100,000 in annual revenue. Although this number is benchmark it varies a lot from lender to lender.
The more super important metric is your ability to handle payment. In this case your revenue stream has to exceed existing operational expenses along with the new loan payment. If your revenue stream is erratic, declining, or stagnating, you have a much harder time building a case for affordability. This is a basic math problem that is fundamental at the heart of business lending.
The Ultimate Business Plan: Your Agility Strategy
A scribbled idea on a napkin may be inspiring, but won’t land you a loan. You need a business plan. This document is a formal pitch, GPS, strategy, and napkin idea all in one. It shows the lender that you’re invested in the plan and you’ve done the legwork. What should it include?
Executive Summary: Powerful but concise.
Market Analysis: Customers, competitors?
Financial Projections: Profits, revenue, and expenses should be realistic. Be ready to defend your numbers!
The “Ask”: Exact amount of money you’re requesting, how you’ll spend each dollar, and a detailed breakdown.
A business plan proves your competence and vision. These two factors, alongside your business loan inquiries, shape the eye of the lender.
Collateral: What’s Your Skin in the Game?
Collateral is an asset like real estate, equipment, or inventory that you pledge to the lender as security for a loan, and for inventory, you can claim as collateral. These assets act as a fallback in the event that a borrower is unable to pay back the loan. This is their safety net.
Because the lender’s risk is lower, secured loans (those with collateral) are easier to get and come with better interest rates. Unsecured loans are very rare and usually only for businesses with outstanding credit and revenue. Assessing what you can offer as collateral is a very practical way to determine what type of business loan you qualify for and to understand what type of loan you should pursue.
There you have it. A self-audit of the business’s finances, operations, and strategy reveals the loan’s business requirements, eligibility, and self-assessment. Assessing credit is about honesty regarding gaps that can be identified that require addressing. Gaps are a given, and a business owner’s given. What is wonderful about this process is it reveals how to improve. Maybe it is a weekend to fortify the business blueprint or six months to fix credit. With the time needed to address these loan-application-related gaps, the business emerges as a force to be reckoned with upon the click of ‘submit’ on the application. So long as the self-assessment is performed, the business is free to pursue its empire.
