How Lenders Assess A Business Before Lending Financial Support.
Financing your business can be tough and it’s not always easy to secure external funding either. You might think it’s relatively easy to be approved for a short term loan, but in actuality, there are a lot of things that lenders look at before making their decision. So, if you’re wanting to get funding for your business from a lender, keep reading and discover what sort of criteria they’ll consider before lending you the financial support that you need.
Credit Checks And Score
One of the first things a lender will check when assessing your loan application is your business credit score. Your score is visible to all lenders, so it’s worth checking it before you apply for a loan as sometimes a bad score can mean an automatic rejection. There are some lenders that will still consider you if you have a bad credit score, but you’ll need to seek them out. The reason your credit score is so highly considered is because it demonstrates to lenders how good your business has been at paying back other forms of finance. You may find that the higher your credit score, the higher amount of finance you could be approved for too. If your business hasn’t had the time to build up a credit score yet, then the lender may look at your personal one. It’s good to be aware of your own score just in case this happens, as again, a bad score could mean your application is denied.
Profits And Losses
When you apply for finance, you’ll most likely have to submit a copy of a few years’ worth (if you have it) of your turnover and losses. This is so the lender can see if you’re succeeding and growing as you should be. If you’re not able to demonstrate that your business is capable of generating a turnover, the lender may not see you as a viable venture to lend to. Without these things to support you, your affordability may seem not as good to the lender, which will make you too much of a risk to approve as you may not make the repayments.
If you’ve already taken out some form of finance for your business like a credit card or overdraft, a lender will look at how much of these you’ve managed to pay off. If you have too much debt already, they may deny you because it can seem too risky to lend to you again. Some level of debt is acceptable, but if you have a lot of debt at high amounts, then the lender can deem you not able to cope with another financial repayment.
Length Of Operations
A financial lender will also check how long your business has been running. Ideally, they want to see a business that has a good few solid years behind them so they know that you’re not likely to go under any time soon. This also demonstrates to them that you’re able to grow, showing you can make the repayments necessary. When you request financial support, you’ll be subject to interest rates, making your total repayment larger than your original amount. Lenders want to know that they’ll be able to get this full amount back, so they want a business that they can see is viable and able to sustain the repayments until the term is completed.
Your business spending is equally as important as your profits and losses. A lender may ask for your business’s bank statements for the past 3 months at least. This way they can see how you manage your spending and how much you’re paying out each month. If you’re applying for financial support, it’s a good idea to take a look at your bank statements before applying and try to view them from the lender’s point of view. Then you can see if you need to make changes before completing your application.
Some lenders will request that you have some form of collateral when applying for their support, so it’s crucial that you’re able to provide it if asked to do so. The reason for collateral is so that the lender has an extra layer of security to fall back on should your business not be able to make the repayments. If you don’t have any form of collateral to offer, your application to that lender could be rejected. However, if your business doesn’t have any collateral to offer, the lender may ask you to make a personal guarantee instead. Checking if you have collateral to offer demonstrates to the lenders that you’re also unlikely to jump ship any time soon, so it makes you less of a risk to lend to.
Business lenders will take a good look at the current economy before lending to you as well. For example, if you’re opening your own independent coffee shop, the lender will investigate the current coffee market and see whether or not it’s a viable venture based on the state of the economy. They’ll also check out your competition to make sure that you’re not setting yourself up for failure, and in turn, not able to pay them back.
Personal Capital Invested
When you own a business, it’s assumed that you would have some of your own personal capital invested in it. If you don’t, a lender may question why and wonder if you’re actually committed to your business. A lender will want you to demonstrate that you’re determined to make your business work, and if they can’t, they might not believe in your venture as much. Applying for financial support as a business isn’t easy and it can be a long process. However, now that you’re armed with the knowledge of what they look for, you should be able to prepare yourself and your business to the best of your ability. Ticking all their boxes is the best way to get your application approved, so make sure you investigate what each lender will require, and you’ll be well on your way to getting the financial support that you need.