When you apply for a small business loan, lenders usually don’t approve it right away. They tend to conduct an extensive analysis on various factors first. And only when they get satisfied does the loan get approved.
If you’re wondering what factors banks take into account before approving your loan application, then this article can help you out. Here are 10 of the most important factors that are considered by lending institutions.
Credit Score
This is by far the most important factor that’s taken into consideration. Your credit score is a crucial piece of information that can either make or break your business loan application. Having a high credit score of at least 650 and above can increase the chances of getting a business loan approved.
Income and Employment History
Your income levels and your employment history also play a huge role in determining whether your business loan should be approved or not. That said, the level of income that you would need to possess to apply for a loan can vary from one lender to another, so that’s something that you should keep in mind. Having a high income level and a long employment history with little to no breaks can lead to a favourable assessment.
Collateral
Many lenders require you to submit a collateral in order to avail a business loan. If you’re unable to pledge any asset or if the collateral is not sufficient, the lender may choose to reject your application. However, this can be circumvented by applying for an unsecured business loan, which doesn’t require you to submit any collateral to avail it.
Down Payment
Just like collateral, there are a few lenders who require you to make a down payment in order to avail a business loan. The higher the down payment you’re able to make, the greater your chances are of getting your loan approved.
Debt-to-Income Ratio
Your debt-to-income ratio is another major factor that’s taken into consideration. If lenders feel that your income is higher than your debt obligations, then your business loan would most likely be approved. On the other hand, if your debt is almost equal to or more than your income, your application can be rejected.
Tenure of the Loan
The loan tenure that you opt for can also determine whether your business loan is approved or not. Opting for a shorter tenure is always advisable since it drastically increases the chances of getting the loan approved. Since lenders can’t predict how your business would fare 5 or 10 years down the line, they might be a little hesitant to offer a loan for such high tenures.
Business Plan
You’re required to divulge your business plan as part of the business loan document list that you’re required to submit at the time of applying for a loan. Lenders generally approve your loan application only if they are satisfied with your business plan.
Business Revenue
The amount of revenue and cash flow that your business witnesses in a year is also a key factor that determines whether you get a business loan or not. The more the revenue your business generates, the higher the chances are for your application to get approved.
Assets of the Business
If you or your business possesses any assets, whether fixed or liquid, chances are that your business loan would get approved by the lender. This is simply due to the fact that lenders can lay claim to your assets to recover the loan if it is not repaid on time.
Age of the Business
To put it simply, the longer you’re in business, the better. Lenders typically view businesses that have been in existence for a few years as low risk and therefore are more inclined to offer business loans.
Conclusion
With this, you must now be aware of the 10 most important factors that lenders take into account before approving your business loan. So, before you go ahead and apply for a small business loan, make sure that all the above listed factors are in order. This can significantly increase the chances of it getting approved.