Lending Library

The availability of dependable cash flow can have a big impact on the success of a small business. Yet a 2021 report from the Federal Reserve shows that, when businesses applied for financing, nearly 60% of applicants were either outright denied or able to borrow only a portion of the money they needed. 

It’s tempting to look at the bank as the bad guy in this scenario. Yet it’s important to understand that smaller commercial loans aren’t always a good fit for large traditional lenders. From a processing and profit standpoint, issuing smaller commercial loans might not be practical for some lending institutions. 

So, what options do small business owners have in this situation? For many small business owners who are stunned to learn how hard it is to get a business loan, the answer is to consider alternative business loans.

What are alternative business loans?

Alternative business loans are business loans, lines of credit or other forms of business financing offered by lenders other than through traditional banks. They are also often called online loans because they are accessible through online applications and platforms.

Alternative business loans vs. traditional business loans.

Traditional business loans are generally associated with banks and credit unions, where the application process can be lengthy and requires extensive documentation, such as financial records and business plans. Interest rates might be lower, but qualifying for these loans is often a challenge for small businesses without a strong credit history or significant collateral.

On the flip side, alternative business loans, accessible through online lenders, provide a more streamlined application process, often with less stringent requirements for credit scores and documentation. They can be a boon for businesses needing quick cash flow solutions, as approval times are significantly shorter, sometimes even within the same day. However, this convenience can come at a cost, with potentially higher interest rates and fees than traditional loans.

What are my alternative financing options?

Here are some examples of alternative financing options available to small businesses.

Business term loans.

Business term loans are what many people think of when they think of business financing. Term loans often feature fixed interest rates, fixed monthly payments, and a fixed number of monthly payments (aka repayment period). Depending on the lender, you may be able to use the funds you borrow for a variety of purposes, from equipment needs to cash flow support to expansion.

Short term loans.

Short term loans earn their title because they typically feature a shorter repayment period. With this type of alternative business loan, you might have to repay your loan within a year or less, though terms can vary. These loans sometimes come with weekly or even daily payments as well.

This loan option could be helpful if your business needs to access funds in a hurry (provided you’re working with a reputable alternative lender). However, you should make sure the loan offer makes sense for your business and that you can manage an expedited repayment schedule. A business owner might consider this type of loan to address a financial slump, manage a seasonal downturn, finance short-term projects, and more.

Equipment financing

Equipment financing is a type of loan that can help you finance essential tools and equipment for your business to operate. The equipment itself typically serves as collateral for the loan. As a result, you may be able to lock in a better rate for this type of financing, compared to other borrowing options. Depending on the lender, however, you may also need to provide a down payment.

SBA loan

Although you can apply for SBA loans with traditional banks, some online lenders offer them as well. Loans backed by the U.S. Small Business Administration can be a great fit for small businesses, since they often feature affordable rates, high loan amounts, and lengthy repayment terms.

On the other hand, the approval criteria for SBA loans tends to be on the stricter side. For example, with SBA 7(a) loans, you’ll need a minimum FICO® SBSS Score of 155 to qualify. SBA loans also tend to feature slower funding periods with loan processes that often take weeks or even months to complete.

Business credit card.

Business credit cards are a flexible financing option that may be available to established businesses and startups alike. However, you may need good personal credit to qualify. The interest rates on business credit cards (and credit cards in general) are often high. So, it’s best to use this form of financing for short-term cash flow support—never borrowing more than you can afford to pay off in a given billing cycle. When you revolve a balance from one month to the next, interest charges generally apply.

Many business credit cards come with the potential to help you build good business credit for your company as well. And if you open a business rewards credit card, you might earn valuable points, miles, or cash back on purchases that your business already needed to make.

Business line of credit.

A business line of credit is another flexible way to borrow money for your business. When you open a line of credit you receive a credit limit—the maximum amount your business can borrow on the account. As you use the line of credit, your available credit shrinks. But when you repay some (or all) of the money you borrowed, you should be free to borrow again against the same credit line.

Business lines of credit often feature revolving interest rates (like credit cards). These revolving interest rates can range from affordable to high, depending on the lender you choose, your creditworthiness, and other factors. Yet you pay interest only on the money you borrow, not the overall credit line. So, you have a bit more control over the process than you would with a traditional business loan.

Business cash advance.

A business cash advance (also called a merchant cash advance) lets your company borrow against money it will make in the future. In general, the cash advance provider will base the amount your business is eligible to borrow on its credit card sales volume.

As you collect future credit card payments, the cash advance company may take a portion of your daily sales to repay the borrowed funds, plus a “factor rate.” Factor rates can be high, making merchant cash advances a potentially expensive financing option. So, it’s important to review your company’s finances and make sure it can handle the expense and repayment schedule before you move forward.

Accounts receivable financing.

Accounts receivable financing—also called invoice financing—offers small business owners another way to borrow against future earnings. If your business invoices its customers and has to wait to receive payment, you might be eligible for this funding solution.

In general, you don’t need good personal or business credit to qualify for accounts receivable financing. Rather, financing companies will consider the creditworthiness and payment capability of your customers (aka debtors) instead.

Peer-to-peer lending.

Peer-to-peer lending (P2P lending) has emerged as a popular alternative financing option for small business owners. Unlike traditional loans issued by banks or financial institutions, P2P lending allows businesses to obtain capital directly from individual investors. This occurs on online platforms specifically designed to facilitate these types of transactions.

For borrowers, the appeal of P2P lending lies in its potentially lower interest rates, flexible terms, and the ease of application and quick funding times. For investors, it offers an opportunity to earn higher returns on their investment compared to traditional savings or investment products. However, it's important for business owners to understand that while P2P lending can be less stringent in terms of creditworthiness requirements, the rates and terms vary widely based on the platform and the borrower's credit profile.

Who are alternative lenders?

Since 2012, more than 100 participants have entered the alternative lending industry.  These companies offer a variety of alternative financing options, from term loans to cash advances. The flexibility that alternative business loans offer can make these funding solutions an excellent resource for small business owners.

See our full collection of best business loans.

Pros and cons of alternative lending.

Pros

Below are some of the benefits that alternative business loans have to offer.

Online applications

Most alternative lenders have embraced technology and provide applicants with simple loan applications that take just a few minutes to fill out. By comparison, some business loan applications can take hours or more to complete, given their sometimes heavy documentation requirements. With a simplified loan application process, alternative lenders free small business owners up to focus on what really matters—running their businesses.

Less stringent requirements.

Traditional lenders will consider a variety of factors when you apply for a business loan. A business lender may review your personal credit score, business credit score, time in business, annual revenue, collateral, and more to determine whether or not to approve your application for financing and what terms to offer you if you qualify.

Alternative lenders tend to be more lenient where business loan requirements are concerned. You might be able to get an alternative business loan with less-than-perfect credit, lower annual revenue numbers, etc. There are even first-time small business loans from alternative lenders for eligible startups.

Faster funding speed.

Another potential perk of using alternative business loans has to do with funding speed. When you work with a traditional lender, you might have to wait days or even weeks after qualification to receive your business loan proceeds. The SBA loan process, for example, is reported to sometimes take several months to complete.

With alternative financing, on the other hand, some lenders offer same-day or next-day funding. This can give small business owners faster access to the capital they need in a hurry to manage cash flow, cover expenses, order inventory, invest in growth opportunities, and more.

Credit building potential.

The potential to establish credit for your business is a valuable benefit. Many alternative business lenders also offer their customers the opportunity to build business credit, just like traditional lenders. If you want to establish business credit, you should look for an alternative lender that reports to one or more of the business credit reporting agencies.

Of course, how you manage your alternative business loan matters most where your business credit is concerned. If you have an alternative business loan that appears on one or more of your business credit reports, it’s essential to pay on time every month. (Tip: Some business credit scoring models may reward you more if you pay early.) If you make late payments on your business credit obligations, however, those negative notations have the potential to damage your business credit scores.

Flexible usage of funding.

Some alternative business loans offer business owners more flexibility when it comes to how they use the money they borrow. If you need to secure financing that your business may need to cover a variety of different expenses or investments, having less restrictive rules around how you use the funds you borrow can be useful.

More financing options.

When you apply for business financing from a traditional lender, you might not have a lot of different funding choices available. Alternative lenders, by comparison, offer a variety of financing options, such as those outlined below.

Cons

While alternative lending offers a plethora of advantages, it's important to approach them with a balanced perspective by considering the possible downsides.

Higher costs

One significant drawback of alternative lending is the potentially higher cost of borrowing. Interest rates and fees may be considerably higher than those offered by traditional lenders, especially for businesses with less-than-stellar credit histories. This can significantly increase the overall cost of financing, affecting your business's financial health in the long term.

Shorter repayment terms.

Many alternative loans come with shorter repayment terms compared to traditional bank loans. This can result in higher monthly payments, which might strain your business's cash flow. It's crucial to assess whether your business can comfortably manage these payments before proceeding.

Risk of unreliable lenders.

The alternative lending space, though innovative, can also attract lenders who are less than scrupulous. Due diligence is essential to ensure you're dealing with a reputable lender. Look for reviews, testimonials, and any possible red flags before you commit to a loan.

Potential for debt cycle.

Because of their accessibility and speed, there's a risk of becoming reliant on alternative lending for regular cash flow needs. This can lead to a cycle of debt that is difficult to escape, especially if the business uses new loans to pay off existing debts.

May not report to credit bureaus.

Some alternative lenders do not report to credit bureaus, which means these loans won't help build your business's credit profile. If building credit is one of your goals, verify with the lender whether they report to the major credit bureaus before you apply.

Less personalized service.

While not always the case, alternative lenders might offer less personalized service compared to a traditional bank where you might have a dedicated relationship manager. This can make it more challenging to negotiate terms or receive guidance based on your specific business needs.

The bottom line.

Navigating the world of business financing can be complex, but understanding your options with alternative lending is a crucial step towards finding a solution that aligns with your company's needs and goals. Whether you're seeking to manage cash flow, expand operations, or simply get through a rough patch, alternative loans offer a range of solutions that might be suitable. Remember, the key is to consider both the immediate benefits and the long-term implications of any financial decision.

Before making a decision, assess your business's financial health, project future cash flows, and consider how the loan fits into your broader business strategy. It's also prudent to consult with a financial advisor to understand the full impact of taking on new debt. Ultimately, by doing your due diligence and thoroughly weighing the pros and cons, you can choose a financing option that helps your business grow while maintaining its financial health.

Alternative lending can be a vital resource for businesses that might not qualify for traditional bank loans. However, it's essential to approach this option with caution, understanding the terms, the lender's credibility, and how the loan fits into your overall financial strategy. With careful planning and strategic decision-making, alternative lending can provide the financial support your business needs to thrive.

Small Business Administration (SBA) loans are some of the most desirable and sought-after financing options available for small business owners. SBA loans are known for affordable interest rates and generous repayment terms that can help small businesses grow and reach their financial goals. At the same time, SBA loans are also somewhat notorious for featuring tedious application processes and slow funding speeds. 

If you plan to apply for an SBA loan, it’s important to have realistic expectations regarding the overall timeline for these financial products. The SBA loan process can take much longer than traditional and online business loans. Often, it takes weeks to apply for an SBA loan, and the underwriting and funding process for an SBA loan can last as long as 60 to 90 days.The guide below will walk you through the steps borrowers need to take to get various types of SBA loans. You’ll discover how to find an SBA lender, the documentation you need to gather for your loan application, and other important details about each loan option.

The SBA loan process.

Applying for an SBA loan can seem overwhelming at first glance, but understanding each step can make the process more manageable. Here are the key stages of the SBA loan process, from initial preparation to final funding, so you can navigate it with confidence. Knowing what to expect and how to prepare will help you streamline your application and improve your chances of securing the loan your business needs.

Getting matched with a lender: 2 days.

The federal government guarantees a portion (up to 75%) of SBA loans. However, the Small Business Administration itself does not issue loans to business owners. Instead, SBA loans come from the same lenders you would seek out for traditional business loans. 

If you’re interested in applying for an SBA loan, the first step you’ll need to complete is getting matched with an SBA lender that’s capable of meeting your needs. You can complete this step online via the U.S. Small Business Administration’s lender match tool. 

The lender match process requires you to complete a brief questionnaire. After you do so, it could take a few days for the system to locate a lender match for your business (though sometimes the process is faster).

Gathering documentation and applying for the loan: Up to 30 days.

The next step in the SBA loan application process is typically the lengthiest and the most difficult for you, the business owner, to complete. SBA loans feature extensive paperwork and documentation requirements. Below is a sample—though certainly not a comprehensive list—of items your lender may want you to include with your SBA loan application. 

• Business licenses
• Detailed list of debts
• Current income statement
• Personal income tax returns (previous three years)
• Business income tax returns (previous three years)
• Business financial statements (profit and loss statements, cash flow projections, etc.)
• Loan application history
• Resumes for principal owners
• Real estate appraisals (collateral)
• Lease agreements (collateral)
• Franchise, asset purchase, real estate purchase, or other purchase agreements (based on loan purpose) 

Depending on the loan purpose and your business’ record-keeping habits, this step might take anywhere from a few days to an entire month. 

Underwriting: As little as 2 weeks up to 3 months.

Once the application is complete and submitted with all required documents, the loan enters the underwriting phase. This is when the lender reviews all the information and documents you provided to determine your eligibility. The underwriting process for an SBA loan can range significantly in duration. Some lenders are able to expedite their review and make a decision within as little as two weeks. However, for more complex applications or during times of high demand, this process can extend up to three months.

During underwriting, the lender assesses the risk of lending to your business, which includes evaluating your financial statements, credit history, business plan, and the collateral you’ve offered. To improve your chances of a favorable outcome and possibly expedite this process, ensure all documentation is accurate, comprehensive, and well-organized.

Waiting for a loan decision: 1-3 weeks.

Once you submit your loan application, it can take several weeks for a lender to review your documents and underwrite your loan. During the application review and underwriting process, the lender will analyze your creditworthiness (aka your likelihood to repay debts) and your capacity to repay (aka whether you can afford additional debt). 

Other details a lender may evaluate include:

• Value of collateral provided
• Business revenue
• Credit history (personal and business)
• Credit scores (personal and business) 
• Personal and business debts

If your application passes through the underwriting process and a lender approves your application, the next step will be to schedule a loan closing date. 

Receiving your loan proceeds: 1-2 weeks (sometimes up to 90 days).

Once a lender approves your application for an SBA loan, it will put together some paperwork to finalize your loan agreement. This process also takes time. (Note: For commercial real estate transactions, you might also have to hire an attorney to facilitate appraisals and title work, and process other legal documents that could add more complexity and time to this process.)

It’s common for an SBA lender to need several weeks to prepare the paperwork you will need to review and sign before you can receive your loan proceeds. That time frame can easily be doubled, tripled, or more with commercial real estate transactions. And some banks warn that the loan closing process for SBA loans could take up to three months.

How long each loan type takes.

Every SBA loan type has its own unique timeline, shaped by varying application requirements and review processes. Understanding these differences can help you better plan for the future and set realistic expectations for the funding your business needs. Here's a brief overview of how long you might expect to wait for some of the most common SBA loan types.

SBA 7(a) loans: 60-90 days.

The SBA’s most common loan program is the SBA 7(a) loan. This general purpose loan can provide borrowers with up to $5 million in funding. Eligible business owners can use SBA 7(a) loan proceeds for a variety of business expenses, including the purchase of commercial real estate, working capital, business supplies, furniture, and fixtures, and to refinance existing business debt. 

SBA 7(a) loans are popular due to their versatility and the substantial loan amounts they offer. However, these loans also tend to take the longest of all SBA loan types. From start to finish, it's common for an SBA 7(a) loan application and funding process to last between 60 and 90 days.

Additionally, SBA 7(a) loan terms are generally favourable, with repayment periods of up to 25 years for real estate and up to 10 years for other uses such as working capital or equipment purchases. This long-term financing can help businesses manage their monthly payments more effectively. Furthermore, these loans often come with lower interest rates compared to traditional business loans, making them an attractive option for small business owners seeking affordable financing solutions.

SBA Express loans: 30-60 days.

Another popular Small Business Administration loan program is the SBA Express loan. With the SBA Express Program, qualified borrowers can receive up to $500,000 worth of funding for their businesses. And for loans of $50,000 and under, lenders do not have to require collateral from borrowers. 

After you complete your application for an SBA Express Loan, you can expect to receive a response from the Small Business Administration within 36 hours. However, the lender makes the final eligibility decision. From application to funding, the entire SBA Express Loan process could potentially take as little as 30 days. 

It is important to note that the federal government guarantees only up to 50% of SBA Express loans. By comparison, the SBA 7(a) loan features a 75% guarantee that lenders can rely on in the event of a default. As a result, SBA Express loans are riskier for SBA lenders to issue. So, they might not be as easy to qualify for, depending on the details of your loan application.

SBA 504 loan: 60-90 days.

SBA 504 loans can be a helpful financing option for small business owners who need affordable financing options for certain types of commercial real estate purchases, machinery, or equipment. Eligible borrowers may receive up to $5 million in funding. For certain energy projects, the maximum loan amount may extend to $5.5 million.  

504 loans are backed (in part) by the SBA and made available through Certified Development Companies, also called CDCs. These are nonprofit corporations that aim to promote economic development in local communities. Around 50% of the total project is typically financed through a private business lender as well, along with at least a 10% down payment from the business owner (sometimes up to 20% down). The SBA-backed portion of the loan comes in the form of a second mortgage for up to 40% of the eligible project costs.  

You can start the application process for a CDC/504 Loan by searching for a local CDC on the SBA’s website. In general, SBA 504 loans can take several months to process. Most borrowers will wait at least two to three months from the time they submit their initial loan application before they receive their loan proceeds (assuming all goes well and they qualify for funding).

Note that you cannot use a 504 loan for working capital, inventory, consolidating or refinancing debt, or investing in rental properties. However, these SBA loans may work well for purchase of real estate assets or equipment that can promote job creation or business growth. Companies that will use funding to improve or modernize existing facilities, land, streets, landscaping, etc., may also be eligible for this SBA loan program.

SBA microloan: 30-90 days.

Small business owners can use the SBA microloan program to borrow up to $50,000 to cover eligible business expenses. The average size of an SBA microloan is $13,000. Even though most microloans feature smaller loan amounts, the intermediary lenders that issue the loans (typically nonprofit community-based organizations) may require collateral, plus a personal guarantee from the business owner. 

Although lenders issue microloans for smaller amounts, the loan process can still be slow. If your small business qualifies for funding, it’s common for it to take between 30 and 90 days between the initial loan application and the receipt of your loan proceeds. Remember, both the SBA and an intermediary lender will have to approve your loan application.

Eligible microloan borrowers can use the funding they receive to support their small business in a variety of ways including to purchase inventory, equipment, supplies, machinery, furniture, and to provide essential working capital. However, business owners cannot use SBA microloan funds to purchase real estate or consolidate existing debts.

Factors that affect SBA loan processing times.

Several factors can impact the processing time of SBA loans, making some applications move faster or slower through the pipeline. Understanding these factors can help applicants set realistic expectations and better prepare for the application process. Key elements that affect SBA loan processing times include:

• Business readiness: The more prepared a business is with its financial statements, business plans, and required documentation, the faster the application process can proceed. Incomplete applications or missing documents can significantly delay the process.
• Lender experience: Working with a lender that has extensive experience with SBA loans can also affect processing time. SBA Preferred Lenders, for example, have the authority to process, underwrite, and finalize most SBA loans without direct SBA review, which can speed up the approval and funding process.
• Loan complexity: Larger loan amounts, or loans used for more complex projects (such as purchasing real estate or starting new construction), may require additional documentation and verification, extending the processing time.
• Time of year: Application volume can vary throughout the year, impacting processing times. Periods of high demand can slow down the process, as lenders and the SBA manage a larger queue of applications.
• Accuracy of information: Inaccuracies in the application or documentation can lead to delays as these issues are identified and corrected. Thoroughly reviewing all information before submission can prevent unnecessary setbacks.
• Economic and policy environment: External factors, such as changes in government policy or economic conditions, can influence processing times. For example, during economic downturns or following natural disasters, the volume of applications may increase, slowing down the process for all applicants.

By being aware of these factors, applicants can take proactive steps to mitigate potential delays, such as choosing an experienced lender, ensuring their documentation is complete and accurate, and applying during lower-demand periods when possible.

How to speed up SBA loan processing times.

While the SBA loan process can be lengthy, there are several strategies you can employ to help expedite your application:

1. Get prequalified: Before you formally apply, some lenders offer a prequalification process that can give you an idea of your eligibility and the potential loan terms. This can help you identify and resolve issues that might slow down the full application process.
2. Organize your documents: Ensuring that all your financial documents, business plans, and personal credit histories are in order before you apply can save valuable time. Missing paperwork or unclear details can cause delays, so it's vital to prepare everything meticulously.
3. Work with SBA Preferred Lenders: Choosing to work with SBA Preferred Lenders can significantly speed up your loan processing time. These lenders have demonstrated their proficiency in processing SBA loans and have earned the authority to underwrite and finalize most SBA loans without needing to direct SBA review. This streamlined process can reduce delays and help you receive your funds faster.
4. Clear communication: Maintain open lines of communication with your lender. Promptly respond to any requests for additional information or clarification to avoid bottlenecks.
5. Hire a professional: Sometimes, hiring a loan consultant who specializes in SBA loans can be worth the investment. They can help you navigate the application process smoothly and identify and address potential issues before they become obstacles.
6. Consider smaller loan amounts: If possible, apply for only the amount you need. Smaller loans often require less documentation and can be approved more quickly than larger, more complex loans.

By following these tips, you can enhance your chances of a swift and smooth SBA loan approval process, helping you secure the funding your business needs with as little delay as possible.

SBA loans vs. other small business loan types.

When deciding on the best financing option for your small business, it’s vital to compare SBA loans with other available loan types. This evaluation can help you determine which loan will best meet the needs of your business, considering factors like interest rates, repayment terms, and application complexity.

Traditional business loans.

Traditional business loans, offered by banks and credit unions, are a common choice for many business owners. These loans typically provide funding quickly once approved, often within a few weeks. However, the requirements for obtaining a traditional business loan can be stringent. Lenders usually look for strong credit scores, a solid business history, and substantial collateral. Interest rates can be higher compared to SBA loans, especially for businesses deemed risky.

Merchant cash advances.

Merchant cash advances (MCAs) provide small businesses with an advance on their future credit card sales. They are typically easier to qualify for than SBA loans, making them an appealing option for businesses with less than stellar credit. However, MCAs come with higher costs, including elevated interest rates and fees, which can make them more expensive in the long run. Repayment is usually tied to daily credit card transactions, potentially straining cash flow.

Business lines of credit.

A business line of credit operates much like a credit card, offering flexible access to funds up to a certain limit. Once established, you can draw from the line of credit as needed and repay it over time. This type of financing is ideal for managing cash flow or handling unexpected expenses. While the application process for a business line of credit can be quicker than for an SBA loan, interest rates may be higher, and the repayment terms could be less favorable.

Equipment financing

Equipment financing is specifically designed for purchasing machinery or other business-related equipment. The equipment itself often serves as collateral, making it easier to qualify for this type of loan. Interest rates and terms can be more favorable compared to other forms of financing. However, this type of loan can only be used to purchase equipment, limiting its flexibility compared to an SBA loan.

Invoice factoring

Invoice factoring, or financing, allows businesses to sell their unpaid invoices at a discount in exchange for immediate cash. This type of financing can be quick and relatively easy to obtain, making it a good option for businesses that need to improve cash flow quickly. The downside is that it typically comes with higher fees and interest rates, and relying too heavily on this type of financing can become expensive over time.

In summary, while SBA loans often come with lower interest rates and favorable terms, the application process can be lengthy and complex. In contrast, other small business loan types may offer quicker access to funds or be easier to qualify for, though they often come with higher costs or more rigid usage restrictions. Evaluating your specific business needs and financial situation carefully will help you choose the most suitable loan option for your circumstances.

The bottom line.

The U.S. Small Business Administration provides many attractive financing options to support small business owners throughout the country. And when it comes to the cost of the loan and loan terms, SBA loans tend to be generous in both areas.

With a proprietary application platform that makes uploading documents fast and easy and a dedicated SBA team on call to answer any questions you have and assist you throughout the funding process, we’ve made it as easy as possible for business owners to access an SBA loan. Learn more about applying for an SBA loan.

Lenders use the debt-service coverage ratio (DSCR) to determine whether your business qualifies for a loan and under what terms. This is just one metric that financial teams consider (along with factors like your credit score and tax returns), but it is vital because it helps you get a fair rate and approval for your request. 

Your DSCR highlights any existing debt you may have and if you can realistically pay it off. Learn more about this concept and what it means for your loan application chances.

What is the debt-service coverage ratio (DSCR)?

The debt-service coverage ratio (DSCR) is essentially a numerical figure that represents your business's ability to repay its debts. It's calculated by dividing your business's net operating income by its total debt service obligations over a specific period, usually a year. A simpler way to think about it is comparing the money your business makes to the money it owes. If your DSCR is 1.00, that means your net income exactly covers your debt payments. Most lenders look for a DSCR higher than 1.00, indicating you have more income than debt and can comfortably manage additional loan payments. A lower DSCR, on the other hand, signals potential risk to lenders, as it suggests your business might struggle to meet its debt obligations.

How do you calculate your DSCR?

You can easily calculate your DSCR once you have your ledgers balanced and have developed a clear picture of the financial risks associated with your business. 

This is the formula to track your debt-service coverage ratio:

Net Operating Income / Debt Service

For example, if you took out a $20,000 loan and have a net operating income of $30,000 for the year, your DSCR is 1.5 ($30,000/$20,000).

Once you calculate your DSCR, you can evaluate whether your income and proposed debt are proportionate or if you need to make changes to become profitable. Here is how you read the ratio:

• If your DSCR is greater than 1.00, you have the operating income necessary to pay off the debt.  
• If your DSCR equals 1.00, you have just enough operating income to cover your debt.  
• If your DSCR is less than 1.00, you do not have the operating income you need to cover your debt. 

Continuing the example, if your business has to close for 6 months and you only have an operating income of $15,000, a $20,000 loan would place your DSCR at 0.75.  

Most lenders prefer applicants to have a DSCR of at least 1.25. This creates a safe cushion in the event that a company’s net operating income decreases unexpectedly.

What is net operating income?

As you learn about the debt-service coverage ratio, you may want to take a step back and learn about net operating income—an important term to help you calculate your DSCR. 

Net operating income tracks a company’s ability to generate a positive cash flow. It is calculated by subtracting your operating expenses from your gross operating income (or revenue). 

For example, someone who owns a real-estate rental property might collect $1,000 each month in rent and $75 monthly in fees for internet and utilities. The landlord would have $1,075 in gross operating income. The operating expenses would include taxes, home insurance, and upkeep like a lawn service. If these expenses cost $475 total, the landlord’s net operating income would be $600.

Why does DSCR matter?

Understanding your debt-service coverage ratio (DSCR) isn't just about getting through the door with lenders—it's about financial health and strategy for your business. It matters because it provides both you and potential financial partners with a clear, quantitative measure of your company's ability to manage and service its debt with the income it generates.

In a real sense, DSCR is a litmus test for financial stability. A strong DSCR indicates to lenders that your business has a healthy cash flow, making it a lower-risk investment. For you, it's a signal that your business operations are generating enough profit to comfortably handle your current debt obligations, plus some. This can give you the confidence to pursue expansion or improvement projects, knowing that your fundamental finances are solid.

Furthermore, understanding and improving your DSCR can open doors to better loan terms, including lower interest rates, more favorable repayment schedules, and higher borrowing limits. In contrast, a lower DSCR might prompt a reassessment of your business strategies and financial management practices to bolster your operating income or reduce debt, protecting your business from over-leveraging and financial distress.

Remember, lenders and financial analysts see the DSCR as a direct reflection of your business's financial health and its future prospects. That's why paying attention to this ratio isn't just about securing loans—it's about securing your business's future.

What is a good DSCR?

A "good" DSCR is somewhat subjective and can vary by industry, but as a rule of thumb, lenders typically look for a ratio of 1.25 or higher. This benchmark indicates that a business has enough income to cover its debt obligations with a little room to spare, which in turn suggests financial resilience. Specifically, for businesses operating in sectors with more predictable cash flows, such as manufacturing or retail, a DSCR closer to 1.00 might still be acceptable because their income streams are more consistent. On the other hand, industries subject to seasonal variations or cyclical demands, like agriculture or construction, might need a higher DSCR to account for periods of reduced income.

It's crucial to understand that a higher DSCR not only improves your chances of loan approval but also may result in more favorable loan terms. This is because lenders perceive a lower risk when a business demonstrates a strong ability to generate profit in excess of its debt obligations. Conversely, a DSCR below 1.00 is a red flag, signaling potential difficulties in meeting debt payments which might necessitate immediate financial restructuring or strategic adjustments to improve profitability.

In essence, while the "ideal" DSCR can vary, aiming for a ratio that comfortably exceeds your lender's minimum requirement is a wise strategy. It positions your business as a sound investment and provides you with leverage during negotiations, potentially saving your business significant amounts in interest and fees over time.

What do lenders learn from your DSCR?

The DSCR is an indicator of risk for your business loan. If you have a low DSCR (or a ratio that is close to 1.00), you are more likely to default on your loan. You may have to miss payments if you don’t maintain your net operating income or you may require additional loans to cover your costs.  

A low DSCR can also cost your business money. Not only are you more at risk for a loan denial because of this ratio, but your lender may charge higher interest levels and have fewer forgiveness options if you get approved. 

You could end up paying more fees and extra expenses to the lender in order to pay off the loan. Your lender might also require you to pay off the loan faster, limiting your other business investment opportunities.

How to improve your DSCR.

There are multiple steps you can take to improve your DSCR, but few offer easy solutions. You may need to make significant adjustments to your business to improve your financial standing. A few options include:

• Decreasing your operating expenses. (Lower payroll costs by adjusting your staff, cancel a few non-essential services.)
• Pay off some of your existing debt. (Wait a few months until your debt is lower to apply.)
• Decrease your borrowing amount. (Take out a smaller loan and apply again after you pay that one back.)
• Increase your net operating income. (Find ways to grow your sales without driving up costs.)

Each solution will have its own benefits for business owners. Some will find it easier to lower their borrowing amount, while others will want to cut expenses to get the funds immediately.

Know your DSCR before you apply for a loan.

You can reduce your risk of loan rejection by calculating your DSCR beforehand. You can understand how likely it is that your loan will get denied based on this score. A higher DSCR isn’t a guarantee for approval, but it can make your loan application look better.

Get to know some of the loan options through Lendio’s comparison guide. You can get an idea of the amount of funding you need and the flexibility required to spend the money how you want. Find what works for you today.

In the fast-paced world of business, maintaining a steady cash flow is crucial for survival and growth. However, even the most well-run businesses can hit a rough patch or find themselves in need of quick capital to seize a growth opportunity. This is where cash flow loans come into play. Think of them as a financial lifeline, designed specifically to keep your business afloat during precarious moments, helping you navigate temporary cash crunches or seize golden opportunities. Whether you're looking to cover operational costs, invest in new equipment, or simply need a cushion during a slow season, understanding how cash flow loans work could be the key to unlocking your business's potential.

What are cash flow loans?

Cash flow loans, in simple terms, are based on the future cash flows of a business. Rather than focusing on the hard assets of the company, lenders evaluate the projected revenue and cash generation capabilities when deciding to fund. This makes cash flow loans particularly appealing for businesses that may not have substantial physical assets, but have strong revenues and profit margins. Essentially, it’s about borrowing from your future self—using tomorrow’s earnings to fuel today’s growth and operations. These loans can be flexible, offering businesses the necessary breathing room to manage expenses, invest in new projects, or expand operations without the immediate burden of traditional asset-based lending requirements.

How do cash flow loans work?

Cash flow loans typically work by allowing businesses to borrow based on their projected cash flows. This is calculated using the business's current financial situation, including income and expenses, to estimate future earnings. Lenders utilize this forecast to determine how much money they can safely lend, ensuring that the business can repay the loan from future income. The process usually involves detailed financial analysis, including a review of the business’s sales history, profit margins, and cash flow statements.

The repayment terms for cash flow loans can vary significantly depending on the lender and the financial health of the business. Generally, these terms include a fixed interest rate and a repayment schedule that may span months or a year. Importantly, because the loan is unsecured, lenders may charge a higher interest rate than traditional secured loans. This higher cost reflects the increased risk the lender takes on by not requiring collateral.

For businesses, managing a cash flow loan responsibly means closely monitoring cash flow projections and making adjustments as needed to ensure the loan does not become a financial burden. It's essential for businesses to consider their ability to manage the loan's repayment schedule, especially during periods where income is lower than expected.

Cash flow loans vs. traditional loans.

When comparing cash flow loans to traditional loans, the key difference lies in the collateral. Traditional loans typically require physical assets as collateral, such as real estate or equipment, making it a challenge for businesses that lack substantial assets but are cash-rich.

Another notable difference lies in the application and approval process. Cash flow loans often boast a faster approval process since the evaluation is heavily based on financial projections and revenue performance, not the valuation of physical assets. This can be particularly beneficial for businesses needing quick funding to capitalize on immediate opportunities or to address sudden financial shortfalls.

However, the trade-off for the convenience and accessibility of cash flow loans is usually a higher interest rate compared to traditional loans, due to the higher risk lenders assume by not requiring collateral. Businesses should weigh these costs against the benefits, considering their cash flow stability, growth prospects, and ability to manage the loan repayment under varying economic conditions.

Ultimately, the choice between a cash flow loan and a traditional loan depends on the specific needs, circumstances, and financial health of the business. Each financing option offers unique advantages and challenges, making it crucial for business owners to carefully assess their situations and future financial projections before making a decision.

Types of cash flow loans.

Cash flow loans come in several types, making them a flexible financing option for many businesses. The types include:

1. Merchant cash advances: Merchant cash advances are a form of financing where a lender provides a lump sum payment to a business in exchange for a percentage of the business’ daily credit card sales.
2. Business cash advances: A business cash advance is another type of financing where a company receives a lump sum of cash from a lender. This amount is then repaid over time via a fixed percentage of the business’ daily sales.
3. Unsecured line of credit: An unsecured line of credit allows businesses to access funds as needed, without putting up any collateral. These credit lines can be helpful for managing cash flow fluctuations or unexpected expenses.
4. Invoice financing: Invoice financing is a form of funding where businesses can borrow money against the amounts due from customers. This option provides immediate cash flow by allowing businesses to turn their outstanding invoices into immediate capital. It’s particularly useful for businesses with long invoice payment cycles, enabling them to maintain operations and growth without waiting for clients to pay.

Pros and cons of cash flow loans.

Before we delve into the advantages and disadvantages of cash flow loans, let’s remember that every business is unique. What works best for one may not necessarily be the right choice for another. It’s crucial to understand your own business needs and circumstances to make an informed decision. Now, let’s get started with the pros and cons.

Pros of cash flow loans

• Fast access to cash. Unlike traditional lending, which can take weeks or months due to the requirement of extensive documentation and collateral valuation, cash flow loans allow businesses to access needed funds in a matter of days. This rapid turnaround can be crucial for covering immediate expenses or capitalizing on timely opportunities.
• Lower credit score requirements on some loans. Since lenders focus more on the projected revenue and cash flows rather than the creditworthiness of the borrower, businesses with less-than-perfect credit can often still qualify. This makes cash flow loans an attractive option for newer businesses or those that have encountered financial difficulties in the past.
• No collateral required in the traditional sense. Cash flow loans do not necessitate physical assets as security, making them more accessible to businesses without significant tangible assets. This characteristic is particularly useful for service-oriented or tech companies, which might not have the equipment or real estate typically required for traditional loans.

Cons of cash flow loans

• Can be more expensive than other forms of financing. Because cash flow loans often come with higher interest rates and fees due to the lack of physical collateral and the perceived higher risk by lenders, they can be more costly over time compared to traditional loans.
• Relies on business generating enough cash flow to repay the loan. A critical consideration for cash flow loans is the dependency on the business's ability to generate sufficient cash flow to meet repayment obligations. Since these loans are based on future earnings projections, any shortfall in revenue can pose a significant repayment challenge, potentially leading to financial strain or impacting the business's credit.
• Riskier for businesses with unstable or unpredictable revenue streams. Businesses that experience significant fluctuations in sales or operate in highly volatile markets may find cash flow loans especially risky. Since repayment depends largely on consistent revenue, periods of low income can lead to difficulties in meeting loan obligations, potentially exacerbating financial instability.

How to get a cash flow loan.

Navigating the process of obtaining a cash flow loan can seem daunting, but with the right approach, it can be streamlined and successful. Here's a step-by-step guide to get you started:

1. Evaluate your financial health: Before applying, assess your business's current financial status. This includes reviewing your cash flow statements, profit and loss accounts, and future financial projections. Understanding these will help you determine how much you need to borrow and can afford to repay.
2. Research potential lenders: Not all lenders offer the same terms for cash flow loans. Spend time researching to find those that cater to your business type and offer terms that align with your needs and repayment ability.
3. Prepare necessary documentation: While cash flow loans may not require collateral, lenders will still expect a comprehensive view of your business's finances. This typically includes financial statements, tax returns, cash flow projections, and a business plan that outlines how the loan will be used.
4. Apply for the loan: Once you have gathered all necessary documents, fill out and submit your loan application. Be prepared to answer additional questions about your business and financial projections.
5. Carefully consider the terms of your loan agreement: Carefully examine the terms outlined in your loan agreement. Pay close attention to the interest rate, repayment schedule, and any fees or penalties for early repayment or late payments. If there are points or terms that are unclear, don't hesitate to reach out to the lender for clarification. Making an informed decision now can prevent misunderstandings or financial strain in the future.

Remember, transparency with your lender about your business's financial health and clear communication can significantly enhance your chances of success in obtaining and managing a cash flow loan.

Exploring alternatives to cash flow loans.

While cash flow loans can be an excellent solution for many businesses, they’re not the only option. Other financing alternatives may be more fitting, depending on your business’ specific needs. Let’s take a look at a few:

1. Invoice factoring: One alternative to cash flow loans is invoice factoring. This method involves selling your unpaid invoices to a third party (i.e. ‘factor’) at a discounted rate. The factor then collects payments directly from your customers, allowing you to get immediate cash. It’s an excellent choice for businesses that have to wait for long periods to receive payments from their customers.
2. SBA loans: SBA loans are backed by the Small Business Administration (SBA) and often come with lower interest rates and more favorable terms. However, they can take time to process and may require more paperwork.
3. Term loans: Term loans are traditional business loans where a lender provides upfront money, repaid over a specified period with interest. They are used for capital investments like equipment or real estate. While term loans have lower interest rates than cash flow loans, collateral and a solid credit history are usually required.

Remember, the best financing option for your business depends on various factors, including your business’ size, its stage in the business lifecycle, its financial stability, and your specific needs. Weigh your options carefully and consider seeking advice from a financial advisor to make an informed decision.

Cash flow loans can be a versatile and valuable solution for businesses requiring extra cash. They provide flexibility and easy access to funds. However, as with any financial decision, it’s important to carefully consider the potential risks. Understanding the nature of these loans—as well as the differences between them and their asset-based counterparts—is crucial for making informed and beneficial financial decisions.

More than 30% of American small businesses are not approved for at least some of the funding they apply for.

Reasons for this can range from operating in a risky industry to a low credit score. But what really shouldn’t be a concern is flubbing the preapproval process by not having the required documentation.

If you’re concerned that you might fall into that category, read on—these are the documents you’ll need to apply for a small business loan or other financing.

Which documents will you need to apply for business financing?

The first thing you will do when you apply for financing at Lendio is give us enough information to help our lender network assess your risk. When you click “Apply now,” you’ll start our 15-minute online application.

You’ll need the following documents:

• 3 months of business bank statements (you’ll be given the choice to connect your account or manually upload images)
• A copy of your driver’s license or state ID
• Voided check from your business account
• Proof of business ownership
• Month-to-date transactions

You’ll also be asked to provide:

• The amount of money you want to borrow
• When your business started and some general information about your business
• Your birthday and your social security number

What documents will you need for the next stage?

After we receive your application, our financing network will review your application and we’ll let you know what you’re eligible for. Depending on the types of loans or other financing you’re being offered, you may need to provide some of the following documents before your financing funds. And you won’t be asked to guess at anything: your Lendio funding manager will walk you through all of this.

You may be asked to provide:

Tax returns 

These will objectively show lenders how much money your company makes, how much you draw from the business, and how much money you personally have in the bank.

Some lenders will want to see profit on your business tax return—and if not profit, then a clear path to profitability. They’ll want to know that you pay your taxes in full and on time. 

Business bank statements

You will have already uploaded 3 months’ worth, but some types of financing can require additional bank info. These documents are used to show lenders your cash flow patterns. BTW, these will need to be business bank accounts, not a personal account.

A business plan

Some lenders will request a copy of your business plan, which they may review from two angles. 

First, they’ll be looking at the legitimacy of both the problem your business solves and your solution to it, as well as how you plan to bring your solution to market and how you plan to make money from it. 

And don’t make the mistake of thinking that only apps and tech platforms solve problems. A hair salon could solve the simple problem of there not being another hair salon closer than 6 blocks away, and it’s a perfectly sound solution to a perfectly reasonable problem.

Second, they’re looking for a good fit, both from your business and from you, and this could mean different things. You may not be a good fit if:

• They have a different idea of how you should be growing
• They don’t share enthusiasm for the category you’re in
• Any of a number of other reasons

Also, don’t worry about not being a good fit, however. Lendio works with 75+ lenders, which opens up a lot of options.

Profit and loss statement and balance sheet

A P&L statement, also known as an income statement, shows a business's revenues, expenses, and profits or losses over a specific period. It helps lenders understand how much money the company is making and where it is being spent.

A balance sheet provides a snapshot of a company's financial position at a given point in time. It lists all of the assets, liabilities, and equity of the business. This document gives lenders an overview of what the business owns and owes.

Business license and related documents

If you didn’t previously upload your business license, you may be asked to by some lenders to provide it now. You could also be asked for a copy of your LLC or articles of incorporation, if relevant.

Debt schedule

A debt schedule is a document that outlines all the outstanding debts of a business, including loans, interest payments, and other financial obligations. It is an important piece of information for lenders when considering a business loan application.

A debt schedule typically includes the following information:

• Outstanding balance: This is the total amount owed on a particular loan or debt.
• Interest rate: The annual percentage rate charged by the lender on the outstanding balance.
• Payment frequency: This refers to how often payments are due (monthly, quarterly, annually).
• Maturity date: The final date by which the loan or debt must be repaid in full.
• Collateral: Any assets that have been pledged as security for the loan.
• Guarantors: Individuals or entities who have guaranteed to repay the loan in case the business is unable to do so.

Documentation requirements for SBA loans.

If you have your heart set on a Small Business Association (SBA) loan, you’ll be asked for the following information in addition to the documentation listed above.

• Why are you applying for this loan?
• How will the loan proceeds be used?
• What assets need to be purchased, and who are your suppliers?
• What other business debt do you have, and who are your creditors?
• Who are the members of your management team?
• Anyone who owns more than 20% of the business will need to complete SBA Form 413.

If any of these seem confusing, don’t worry. If you apply for financing through Lendio’s marketplace, your funding manager will explain any additional documentation required. You’ll also upload everything in your online document center, so you’ll have a record of what you’ve submitted and what’s still missing.

It’s common for companies growing faster than their current income to seek outside capital to keep up their momentum. An under-capitalized business will find it difficult to make the leap required to scale and expand.

A clear first step to lining up outside capital is to determine whether equity investment or debt financing (or a combination of the two) might be the best route for your business.

What is equity financing?

When you own a business concept or company, there’s a subjective value attached to it called equity. The equity of any type of asset—whether intellectual or physical—is the value someone is willing to pay for it, minus its liabilities. That could mean the value of an entity today (measured in time and money invested) versus its value in the future (measured by comparable growth).

Once the owner and investor determine the “valuation” of the asset, the owner can then sell parts of the equity to raise capital. 

Types of equity financing.

There are a variety of methods to raise equity capital, including seed capital, angel capital, and managed venture capital. Here’s a closer look at each of these popular equity financing solutions. 

Seed capital

Seed capital typically comes from private investors (often personal sources like friends and family members) during the startup phase of a company’s development. It only qualifies as equity financing if the investor receives a piece of the company in return for its investment.

Angel capital

Angel capital comes from angel investors—typically high-wealth individuals who invest in businesses (startups included). In exchange for angel capital, an investor will require a piece of the companies in which they invest.

Managed venture capital.

Venture capital funds come from managed, pooled investments. This type of funding is usually only available to startups with the potential for rapid growth and high returns. Again, you’ll have to give up a share of your business in exchange for the investment dollars you receive. 

What is debt financing?

Debt financing is a source of business funding where a lender provides to the business an agreed-upon amount of money that is to be repaid over a period of time, in addition to any associated fees or interest.

Types of equity financing.

There are a variety of methods to raise equity capital, including seed capital, angel capital, and managed venture capital. Here’s a closer look at each of these popular equity financing solutions. 

Seed capital

Seed capital typically comes from private investors (often personal sources like friends and family members) during the startup phase of a company’s development. It only qualifies as equity financing if the investor receives a piece of the company in return for its investment.

Angel capital

Angel capital comes from angel investors—typically high-wealth individuals who invest in businesses (startups included). In exchange for angel capital, an investor will require a piece of the companies in which they invest.

Managed venture capital.

Venture capital funds come from managed, pooled investments. This type of funding is usually only available to startups with the potential for rapid growth and high returns. Again, you’ll have to give up a share of your business in exchange for the investment dollars you receive. 

Key differences between debt financing and equity financing

Understanding the key differences between debt financing and equity financing can help you make an informed decision tailored to your business needs.

1. Ownership and Control

• Debt Financing: You retain full ownership and control of your business. Lenders have no say in business decisions.
• Equity Financing: You give up a portion of ownership in your business. Investors may have input on business decisions and strategic direction.

2. Repayment Obligation

• Debt Financing: Requires repayment of the borrowed amount, plus interest and fees, according to the lender’s terms.
• Equity Financing: No obligation to repay the investment. Investors expect returns in the form of dividends or an increase in the company’s value.

3. Profit Sharing

• Debt Financing: Profits remain with the business owner. There is no requirement to share profits with lenders.
• Equity Financing: Profits need to be shared with investors based on their equity stake. This can reduce the total profit that goes back to the business.

4. Credit Impact

• Debt Financing: Can help build business credit if the lender reports to credit agencies. Poor credit might make it difficult to qualify.
• Equity Financing: Doesn’t impact business credit directly. Credit history is generally not a barrier to obtaining funds.

5. Business Risk

• Debt Financing: Poses a risk if the business is unable to meet repayment obligations, potentially leading to loss of collateral or personal assets if a personal guarantee is involved.
• Equity Financing: Reduces financial risk since there’s no debt to repay, but you risk losing a measure of control and having to share future profits.

Considering these differences can clarify which financing option aligns best with your business goals and current financial situation.

When to choose equity vs. debt financing.

Every business has to choose for itself whether equity financing or debt financing makes the most sense, and many companies opt for a mixture of both types of funding. There are risks with either option you choose. 

If your business closes and it still owes outstanding debts, you may still have to repay those loans plus interest. The same isn’t true with equity financing. On the other hand, if you sell your business for a sizable profit, paying off shareholders could be much more expensive than the cost of paying off a business loan. 

It’s up to you to weigh the pros and cons of each type of financing and figure out which solutions make the most sense for your business. 

Lendio’s mission is to empower your small business by making small business loans simple by providing options, speed, and trust. Whether you are looking for an acquisition loan or a startup loan, Lendio offers hundreds of different loan products from a variety of lenders. Find out which business loan is best for you.

Understanding how credit scores are calculated can sometimes feel like unraveling a complex puzzle. However, breaking down the key components gives a clearer picture of how these scores are derived and what they signify. A credit score is essentially a numerical representation of your creditworthiness, influenced by various financial behaviors and patterns. This guide will delve into the factors that impact your credit score and explain how each element contributes to your overall rating.

What is a credit score?

A credit score is a numerical representation of your creditworthiness. It is calculated based on your borrowing and payment history and indicates to lenders how likely you are to repay your debts on time.

It’s also important to understand that you don’t have just one credit score—different lenders and credit reporting agencies use multiple credit scores. While most scoring models assess similar factors such as payment history, amounts owed, length of credit history, new credit, and types of credit, they may weigh these factors slightly differently, resulting in variations in your score.

How is a credit score calculated?

The most common credit score you’ll hear of is FICO or the Fair Isaac Corporation. FICO determines the creditworthiness of an individual with a number, typically between 300 and 850. This FICO credit score is the lending industry standard for making credit-related decisions.

FICO scores are calculated from information pulled from the three major credit bureaus in the United States: Experian, TransUnion, and Equifax. These bureaus, in turn, gather information from lenders like credit card companies, student loan lenders, and banks.

FICO credit scores are divided into several ranges that help lenders assess an individual's credit risk. Here's a breakdown of the different ranges:

• Very Poor (300-579)
• Fair (580-669)
• Good (670-739)
• Very Good (740-799)
• Exceptional (800-850)

Your personal credit score has a large impact on your ability to get a business loan. Most lenders will have a minimum credit score requirement in addition to other eligibility criteria.

FICO determines your credit score based on five factors, but each is weighted differently. Your repayment history and overall credit utilization are the main components of your score.

5 components of your FICO credit score.

1. Payment history

FICO says that payment history determines 35% of your credit score, making this factor the most important aspect of your credit reports. The guiding wisdom here is that past repayment behavior is the best way to determine your ability to pay off new debts.

“Both revolving credit (i.e., credit cards) and installment loans (i.e., mortgage) are included in payment history calculations, although installment loans take a bit more precedence over revolving credit,” financial expert Rob Kaufman of FICO writes. “That’s why one of the best ways to improve or maintain a good score is to make consistent, on-time payments.”

You can boost this portion of your score, and, therefore, greatly boost your FICO credit score overall, by paying down existing debts. One of the fastest ways to push your score skyward is to pay off a debt like a credit card completely. Even ensuring your payments are timely can have an impact, although paying above the minimum will compound your efforts to improve your score.

2. Amounts owed

The next biggest factor FICO uses in determining your credit score is your “credit utilization.” As the term suggests, this metric compares the amount of credit you are using to the credit available to you. This factor accounts for 30% of your FICO score.

Basically, your credit utilization is the percentage of debt you carry. If your credit burden is high, it will lead lenders to believe that much of your monthly income is going toward debt repayments.

“Credit score formulas ‘see’ borrowers who constantly reach or exceed their credit limit as a potential risk,” Kaufman explained.Generally, a “good” credit utilization ratio is 30% or less. Improving this aspect of your credit score can require some strategic thinking. If you pay off a credit card, you might want to keep that account open so the open credit line pushes the ratio in your favor. Similarly, asking for credit limit increases can better your burden percentage.

3. Length of credit history

The number of years you have been using credit has an impact on your score. FICO says it makes up 15% of your score, although this can be a bigger factor if your credit history is very short.

“Newer credit users could have a more difficult time achieving a high score than those who have a credit history,” Kaufman said, “since those with a longer credit history have more data on which to base their payment history.”

It’s smart to always have some lines of credit open, even if you aren’t using them. This approach is especially true if you, or your children, are young adults, although you want to ensure you can responsibly handle credit cards.

4. Credit mix

Credit mix accounts for 10% of your FICO score, so it is a relatively minor factor unless your credit history is limited. Generally, lenders like to see several different kinds of lines of credit on your report, like credit cards, student loans, auto loans, and mortgages.

“Credit mix is not a crucial factor in determining your FICO score unless there’s very little other information from which to base a score,” Kaufman stated.

If you have multiple lines of credit open, you probably don’t have to worry about this factor. Instead, focus on changing your credit utilization ratio or improving your repayment history.

5. New credit

The final 10% of your FICO score is determined by how many lines of credit you have opened recently. This aspect is why people say hard checks on your credit score can actually hurt your standing.

“Opening several new credit accounts in a short period of time can signify greater risk—especially for borrowers with a short credit history,” said Kaufman.

When you apply for a new credit card, loan, or lease, lenders look at your credit history. This check itself shows up on your credit report, even if you were denied the line of credit.

Inquiries can remain on your credit report for 2 years, but FICO only includes credit checks made in the last 12 months in determining scores. “Soft” checks on your credit, like credit monitoring services, are not included.

What doesn't affect your credit score?

Several factors contribute to your credit score, but some things don't impact it:

• Personal information: Age, race, ethnicity, nationality, sex, and marital status don't influence your credit score.
• Soft inquiries: Background checks by potential employers or when you check your own credit report don't affect your score.
• Salary and employment: Salary, employment history, and occupation are not considered when calculating your credit score.
• Location and rental payments: These are not factors unless reported to and recorded by credit bureaus.

Lenders may use this information to evaluate credit applications, but it doesn't directly affect your numerical credit rating.

Whether you’ve gone through a personal or business bankruptcy, lenders will consider past bankruptcies when making a loan decision. This post will cover common questions about bankruptcy and how it impacts your loan application.

Can you get a business loan after bankruptcy?

Yes, you can qualify for a business loan if you’ve had a bankruptcy. However, lenders will want to see that you’ve rebuilt your credit and will have varying waiting periods before you are eligible.

When can you qualify for a loan after bankruptcy?

Bankruptcy policy will vary by lender. Some will require waiting seven years when the bankruptcy will be removed from your credit report. Others will consider your application within two to three years after the bankruptcy is closed if you’ve rebuilt your credit score. Some lenders will disqualify you if you have had multiple bankruptcies.

Can you get an SBA loan after bankruptcy?

Yes, you can qualify for an SBA loan if you’ve had a previous bankruptcy. The policy will vary by lender but generally starts at no bankruptcies or foreclosures in the past three years with no more than two total bankruptcies. 

Types of bankruptcy.

Chapter 7 bankruptcy

Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, involves the sale of a debtor's non-exempt assets by a trustee. The proceeds are used to pay off creditors. This type of bankruptcy is designed for individuals or businesses that don’t have the means to pay back their debts. For businesses, this usually means the end of operations. However, individuals might see it as a fresh start, albeit with a significant impact on their credit report for 10 years.

Chapter 11 bankruptcy

Chapter 11 bankruptcy is primarily for businesses, allowing them to continue operations while reorganizing their debts. It’s a complex process that involves negotiating with creditors to modify the terms of the debt without selling off assets. This form of bankruptcy can be expensive and time-consuming but offers businesses a chance to recover and eventually return to profitability.

Chapter 13 bankruptcy

Chapter 13 bankruptcy is aimed at individuals with a regular income who want to pay their debts but are currently unable to do so. It involves a repayment plan lasting three to five years, allowing debtors to keep their property while making more manageable monthly payments towards their debt. The successful completion of the payment plan can lead to the remaining debts being discharged. Chapter 13 bankruptcy remains on an individual's credit report for seven years, offering a less severe impact compared to Chapter 7.

Waiting periods

Typically, a bankruptcy will remain on your credit report for at least 7 years. However, because the court filings are public, the fact that you declared bankruptcy would remain part of the public record if someone searches for it.

Steps to qualify for a loan post-bankruptcy.

Rebuild your credit.

Rebuilding your credit after bankruptcy is crucial for qualifying for a business loan. It may seem daunting, but it's possible with a strategic approach:

Start by regularly checking your credit report for inaccuracies. Dispute any errors that can negatively impact your score.

Consider obtaining a secured credit card. This requires a deposit acting as your credit limit.

Make small purchases with this card and pay off the balance in full each month. This shows lenders your responsible credit use.

Always make payments on time, keep your credit utilization low, and be patient. Credit rebuilding takes time, but consistent effort will gradually improve your creditworthiness.

Research lenders.

Find out which lenders will work with business owners with a prior bankruptcy and the thresholds you'll need to meet before you apply.  If you apply through Lendio, we can help match you with lenders who will work with someone with your credit history.

Grow business income.

Lenders will also consider your business's current financial standing and future potential when evaluating your loan application. Focus on increasing revenue and building strong cash flow to demonstrate the ability to repay a loan.