What do lenders really look at before approving your business loan?

There are several ways you can secure funding to launch your business. You could use your personal savings, an angel investor, or take the more traditional route, and apply for a bank loan. Many small businesses are stepping away from traditional loans and using alternative funding options to grow.

In fact, Nucleus Commercial Finance found that a whopping 94% of SMEs are aware of the various finance options available from both banks and alternative lenders. Businesses are taking more time to consider their options before jumping into a traditional bank loan.

If you decide a business loan is the best funding option for you, here are a few things lenders will look at.

Your business’s commercial credit score

Whether you choose a bank or an alternative lender, they will conduct a credit check before approving your business loan. Your businesses’ credit score is calculated on different factors, like how you have handled borrowing in the past and repayment plans. Lenders will use this score to assess whether your business loan should be accepted. A bad credit score can drastically reduce the number of lenders willing to provide a loan to your business. You should regularly check your business credit rating and stay on top of your money management.

The age of your business

Every lender will ask how long your business has been established. When offering funds, the lender needs to know how you will return the money with interest. Typically, more established businesses are more likely to receive larger loans from lenders – provided they have a good credit score. Older businesses can provide evidence of business operation and how they have handled their money over the years.

Income versus expenses

A high income boosts your chances of getting funding for your SME. However, if the expenses of your business are also high, lenders may be a little concerned about your money management. Lenders may offer you a lower loan that they are more likely to get back. Remember, a lender’s main priority is to make sure you can repay the loan with interest.

Business plan

Start-up companies need a detailed business plan to show lenders. You can forecast cash flow and outline your short and long term business goals. You should also include your market analysis, description of your company, financial projections and an executive summary. A strong business plan can help you to secure a larger loan.

Bank statements

Before applying for a loan, keep an eye on your bank statements for a few months. Lenders may take a deep dive into your bank statements to see exactly where your business’s money is going. They may ask for at least three months of bank statements to analyse your spending habits. Try to cut back where possible and monitor your spending closely. It could make a huge difference to the loan you are offered.

A business loan can help to get your company off the ground or onto the next level.

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