Ultimately, the point of compiling and submitting all these documents to lenders is to paint a picture of your business showing that you meet the lender’s qualification standards for debt financing.
The exact standards used are wide-ranging and can vary from lender to lender, but they typically boil down to these four most essential factors:
1. ANNUAL REVENUE
How much money does your business bring in per year, on average?
Lenders like to see that you have enough cash coming into your business to cover your loan payments, along with the rest of your company’s operating expenses. That’s why your annual revenue is a major indicator to lenders of your eligibility for a business loan.
Typically, lenders want to limit your total loan amount to less than 12% of your business’s total revenue, ensuring that you’ll be able to make your loan payments even when unexpected expenses come up.
2. TIME IN BUSINESS
How long has your business been operational?
Small business startup loans are notoriously hard to secure, because lenders know that the younger your business is, the less likely you are to make it for the long haul.
Businesses that have been operational for more than two years are typically considered the most fundable. If you’ve made it through your first year of business, you likely still have options. But if you’ve been in business for less than a year, you may have a harder time being approved for debt financing.
3. AVERAGE BANK BALANCE
How much cash do you have in the bank?
It’s inevitable in business that unexpected expenses come up. From a leaky roof to a bad batch of inventory, these little extra costs can tank your business if you’re sitting unprepared. That’s why even if your sales numbers are fantastic, a low bank balance will raise eyebrows over your ability to cover your loan payments on time, every time.
For maximum fundability, aim for an average bank balance equal to at least three months of operating expenses for your business, including your loan payment. If that feels out of reach, anything over $1,000 will help your loan eligibility.
4. PERSONAL CREDIT SCORE
What’s your personal credit score?
Particularly if you’re a first time business owner with a relatively new business, your personal credit score will play a critical role in your chances of being approved for a small business loan.
Borrowers with a credit score above 700 are typically excellent loan candidates. If your credit score is between 640-700, you’ll likely still have several options available, depending on your credentials in the other three categories. However, if your personal credit score is under 600, you may struggle to be approved for a loan.