Regardless of the type of business loan you’re looking for, you can almost guarantee the lender will ask these 4 questions. For that reason, in preparation for a business loan, it would be advantages to know the answers to these questions right off the bat.
- Time in Business
It’s a sad statistic, but did you know that about 50% of U.S. small businesses go out of businesses within the first 5 years? If you’ve beaten that statistic, congratulations! The next important thing is to note how long you’ve been in business. The general rule is, the longer, the better. If you’ve been in business for a few years and have some established business credit, lenders will feel a lot more comfortable lending you money since they have a reasonable expectation that they will get paid back.
What about for businesses that haven’t been in business that long?
If you need money right away, consider alternative financing sources. If you don’t necessarily need financing for now, the best you can do is wait it out and hang on. After you’ve been in business for at least 2 years lenders will be more willing to offer you financing. The 5-year mark is the goal, and while you’re on your way there, avoid getting stuck with too much debt and work to keep your business and personal credit strong.
- How Much Your Business Makes & How Much it Keeps
Next, lenders want to know your profits and revenues.
Gross revenue (or total revenue) is the sum of all income received from customers before expenses are paid (such as overhead payments, new equipment, paying back debt, etc.)
Net Profit (or net income, net earnings) is calculated by taking your gross revenue and subtracting your expenses.
Net profit is a more important number, for lenders, than revenue. Net profit shows how much of your income you actually keep. It is entirely possible to have strong revenues, yet still not make a profit because of your expenses.
- How Well Your Business Manages Cash
To understand how well you manage cash flow, lenders will look at your financial statement and average bank balance. Cash flow is different from profitability. Even a profitable company can struggle with cash flow problems.
Lenders like to see cash flow statements because this shows how much money you have available at any given time.
Why does this matter? Suppose your business makes $100,000 in profit annually, and you take out a loan with a monthly payment of $1,000. Initially, it looks like repaying the loan should be no problem. However, what if you’re a Christmas retailer and $90,000 worth of your annual profit doesn’t come in until the fourth quarter of the year? Will you have enough cash on hand during the first 9 months of the year to make that monthly payment?
Your cash flow statement and business bank statements should prove to potential lenders that, at any given moment, you’ll have enough cash on hand to cover your loan payments—with extra to spare.
- How is Your Debt Repayment History
As mentioned before, lenders do want to see your business and personal credit. Even if you’re applying for a business loan, your personal credit score is still important. Why? Because if your personal credit has some blemishes on it, then chances are your repayment habits will spill into your business as well.
Especially if you don’t have 5 years of business credit history, your personal credit score might be all that your lender has to use. No matter how long you’ve been in business, lenders still tend to look at your personal credit score as a reflection of your overall “creditworthiness”.
- A personal credit score of over 780 is considered excellent,
- A credit score between of 661 to 780 is considered very good,
- And a credit score of 601 to 660 is considered fair.
You don’t need an amazing credit score to get business financing. In fact, at Harbour Capital, we specialize in helping lower tier credit secure financing for their business operations. Apply today and let us show you how we can help your business grow.