So you’re thinking of getting a commercial loan for your small business. Before you get into the loan application process, step back and consider which options are suitable for you, depending on your business’s financial status, the stage of growth your business is in, and your goals, both immediate and long-term.
Here are the things you should focus on as you decide which commercial loan is right for your needs and objectives:
Your annual income is a key indicator of how eligible you are to take a small business loan. Before they approve your application, lenders will want to be sure that you have enough incoming cash that allows you to cover your loan payments, aside from all your operating expenses. For verification, they will ask for your latest Profit & Loss Statements as well as your tax (personal and business).
Earning revenue is only one part of managing a successful business. How you handle your money is just as important. Lenders want to be confident that whatever issues threaten your cash flow, you are able to maintain a safe cash buffer to keep the business from collapsing. Even with stellar sales, lenders may still question your ability to repay your loan in full and on time if you have a low bank balance.
Make sure you have an average bank balance of at least three months’ worth of your business’s operating costs – including your loan payment – to pass the underwriting process and expand your business loan options. Lenders will take a look at your recent bank statements and compute for your average bank balance looks like, and then they will decide whether or not your business is likely to hold up as you pay off the money you owe them.
Funding a younger business comes with a lot more risks to the lender than lending to an older, more established company. Clearly, a business that has been around for years is more stable than one that is yet young and have so much to prove. Truth is, only 50% of small businesses survive beyond the 5-year mark.
Lastly, in terms of commercial loan underwriting, an applicant’s personal credit score is generally the most critical requirement. Lenders automatically think that your way of handling your personal finances is exactly how your business finances will be managed. Thus, your personal credit score will always be a huge factor in terms of your eligibility. So you should make sure to keep this number high.
Essentially,your personal credit score is a way of measuring your reliability as a borrower. It depends on a whole range of factors, such as credit utilization, bankruptcies, and more.