Your business probably qualifies for one type of loan or another, but many factors are at play depending on you and your business. Here are some things that lenders consider when deciding which loans you qualify for.
Your personal credit score will be a major factor for most lenders when they are determining if you will qualify for a business loan. FICO, or the Fair Isaac Corporation, calculates your creditworthiness with a number between 300 and 850. This FICO credit score is the lending industry standard.
Generally, a bank will want you to have a credit score above 720, although 800 and above is ideal. Several options are available if your score is at least 600, though. If your score is in the 500s or below, there might be some lending opportunities you can take advantage of, but you should focus your efforts on building your credit.
The most important part of your FICO score is your payment history, which accounts for 35% of your score. The credit bureaus believe that how you have paid back debts in the past is the best indicator of how you will pay off new debts in the future, and many lenders would agree with this line of thought. Therefore, the most efficient way to improve your overall credit score is to pay down existing debts and always ensure that you are paying on time.
The second most important part of your FICO score is “credit utilization,” which is a ratio of how much debt you have compared to how much credit is available to you. FICO says this makes up 30% of your score. You can improve this portion of your credit score a few ways. You can pay down existing debt as much as possible, or you can see if you can increase the maximum limits of your current accounts. The credit bureaus say that a “good” credit utilization level is around 30%.
FICO looks at 3 other specific factors when deciding your credit score, but individually, each factor does not alter your score a whole lot. FICO says that the length of your credit history makes up 15% of your credit score. Your credit mix, meaning the variety of debt you have, makes up 10% of your credit score. Additionally, the amount of new credit you have taken out recently makes up another 10% of your credit score.
When considering what loans you could qualify for, think about what your business will do with any new funding. The purpose of the loan will guide what lending products you will pursue. You can probably use a business credit card to stock up on office supplies, but you will want to look at a term loan from a bank if you are seeking to open a new location. Create a business plan and think about how your business will grow over the next 1 to 5 years.
Different types of loans have different types of conditions. The funding your business qualifies for will depend on your credit score, how long your business has been in existence, and how much revenue your business earns on an annual or monthly basis. Different lenders will weight these factors differently when deciding if you qualify.
Most often, when talking about “small business loans,” we mean term loans that are offered by a bank or credit union. These loans are usually for large amounts and have repayment periods that can span decades. The interest rates are some of the best available, which is why these term loans are some of the most sought-after loans. To qualify, banks typically want you to have been in business for at least 2 years. Though the terms of these bank loans are usually pretty beneficial for the small business owner, the bar to qualify is kept fairly high.
Fortunately, a range of lending products is available for small business owners that are easier to qualify for, although the interest rates might be higher and the initial principal might be lower. Some options, like accounts receivable financing, do not even require a hard check on your credit report because they’re based on other factors, like the amount of money you are owed through outstanding unpaid invoices. A simple option many small business owners take advantage of is the business credit card, which often can be tailored toward your funding needs. Think about the specifics of your needs—equipment financing, for example, is available for funding the purchase of necessary business equipment like a car or 3-D printer.