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Home Business Loans Guide To Business Loan Requirements
If you’re looking to secure small business financing, there are many things that you will want to make sure that are in order and healthy.
Many lenders consider the Five ‘C’s (or a variation of them) when evaluating a potential small business owner for a business loan:
This is a subjective measure that addresses your reputation and the reputation of your small business. Although this is a very important measure, many bankers ignore, or minimize the value, of this ‘C’ in favor of the other more tangible metrics.
One of the most important of the Five ‘C’s, every lender will look at your credit score when they evaluate you for a potential loan. Business owners of a young company will likely need to show their personal credit score as well as their business score (and yes, there are two scores). Depending on the lender, they all have a score threshold they will not go below. For example, the threshold for a bank is often significantly higher than that of an alternative lender—say 680 instead of 550.
This ‘C’ is particularly challenging for early-stage companies and start-ups. It’s difficult for anyone to offer a small business owner a loan if there’s no clear evidence they have the capacity to repay the loan.
Most lenders will evaluate your ability by comparing your annual revenue against your recurring debt. Nobody wants to see you default on a loan, which is why an early-stage or idea-stage company with no product on the market to sell and no income has such a tough time securing financing.
Time in business is another common metric lenders use to measure capacity. Lenders will start considering applicants with a time in business of at least six months.
Most lenders want to see some skin in the game, which is the capital in this ‘C’. A significant financial contribution by the small business borrower lessons the likelihood of default.
Most of the time collateral is in the form of either property or larger assets like equipment. Collateral is one of the most important ‘C’s, which is why we’re talking about it today.
If we consider collateral in the context of a commercial real estate loan, it’s easy to wrap our heads around it. The collateral for the loan is the property we intend to purchase. If the small business owns real estate and needs a small business loan, in much the same way a homeowner would leverage the equity in their home to fund a second mortgage, a small business owner can leverage the equity in any property owned by the business to collateralize a small business loan.
The same is true with regards to an equipment loan. The equipment acts as collateral.
Many alternative lenders weigh the ‘C’ of collateral as more relevant than some of the other ‘C’s. Which is why some small business owners who wouldn’t qualify based upon their credit score are able to get a loan based upon other criteria. An MCA loan, for example, uses the volume of a merchant’s credit card transactions as collateral. A factor, uses a small business’ accounts receivable as collateral. Next to credit score, the fifth ‘C’, collateral, is probably the biggest influencer regarding whether or not you’re able to successfully get a small business loan.
All five are important, but minimizing the value of collateral is a sure way to make sure you hear “no” at the bank. The right collateral is a great way to ensure a lender says, “yes.”
First, ask yourself if you need financing at all. Could you manage with existing cash flow, or do you really need the extra boost for the expansion you’d like to invest in? It’s better to get a loan before you need it, so think about whether or not you’ll need it in the near future.
If you decide that your current cash flow will not be enough, identify why you need more capital. Are you expanding? Is it for your startup?
Lenders will want to know specifics. Are you investing in new equipment? Hiring more employees? Expanding or upgrading your office space? Don’t leave anything out. Specify what it will be used for with corresponding dollar amounts.
You’ll also want to articulate why you need these improvements? How will these investments grow your business?
If you need a loan tomorrow, you’re probably already too late. Don’t wait for a crisis to apply for small business financing of any kind. Look ahead and plan for growth and protection from crises.
This is where you’ll really need to get into the details. If you’re looking for startup loans, it’s difficult to know if your financial forecasting is accurate. Many entrepreneurial experts say it costs twice as much as you expected when it comes to startups.
If you’ve been in business for a few years or more, you should have a financial record that will give you a better idea of what you can expect to borrow.
There should be two parts to your answer:
Lenders want to see a realistic vision of how the invested capital will expand and grow your bottom line so that, ultimately, they receive repayment.
Your personal credit is just as important as your small business’s credit–especially if you’re a startup. If your business is young, lenders will want to see your personal credit as well. And, depending on the lender and the type/amount of loan you’re looking for, lenders will likely want to see your personal credit even if you’ve been in business for years.
It takes more than money to grow a successful business. If your team is under-qualified or experiencing any kind of dysfunction, you’ll want to take this into consideration when you think about the risks of taking on debt. Make sure your team is qualified and has the resume to impress lenders.
Here is some specific preparation you’ll want to make before you start looking for a loan. Some of this will likely seem pretty obvious, but there might be a few surprises. Most of this advice is the result of speaking to lenders, hard lessons learned by experience, and conversation about this topic with my colleagues.
You’re probably more qualified for a small business loan than you think you are. Just take a deep breath, fill out our 15-minute application, and explore your options.
Applying is free and won’t impact your credit
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