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What you should know before applying for a business loan

What you should know before applying for a business loan

Getting a business loan sanctioned can look as an overwhelming experience for many. If it is time to expand your business, you will need to access working capital to meet the spending in terms of paying for employees, materials, equipment, marketing, office space and others. Since not all the aspiring entrepreneurs can have some saving to invest, business loan comes to their aid. Here are the different eligibility criteria that will decide if you can avail of a business loan.

Credit

The most important criteria for getting a business loan is a good credit score. The better your credit score and credit history are, the more are your prospects of getting a business loan. In fact, the lenders will be eager to learn your personal as well as business credit history and credit score. Since most small-business owners might not have a business credit, personal credit is deemed highly important. Getting credit score from accredited bodies is very essential since the banks will consider only their credit score reports.

Income and cash flow

Cash flow is an important criteria that can make or break your business. If you have a steady and a dependable flow of income, the lenders will be able to conclude that you will be able to manage the loan payments. We can say the cash flow is the most important representation of how healthy your business is. Lenders will also look into your expenses to ascertain if your business is profitable. Unpaid invoices can seriously impact your cash flow or turnover. Hence you must be wary of them.

The age of the business

Over 20% of businesses fail during the first year. Hence most lenders and bankers will expect a minimum business age from the borrowers. In majority of cases, the age requirement for a business to be eligible for a loan can be six months to two years. The lenders will also look at how long the business is operating its bank account and for how long the business is registered with the government.

Present amount of debt

Lenders will also examine your debt-to-income ratio to calculate the percentage of your monthly debt repayments against the gross income you make per month. Majority of the lenders expect the debt-to-income ratio to be around 50% or lower. If the business has other existing loans, lenders will hesitate to give a loan.

Collateral

For a loan to be approved, the lenders will need collateral like real estate, equipment, real estate, and businesses. In fact business car loans also will need collateral. Collateral can be understood as tangible assets that the business owner already owns and which they can pledge for the purpose of borrowing the loan.

Your industry

The kind of industry to which your business belongs is one of the most important criteria looked into to ascertain your eligibility for business loan. If the industry is considered risky, you might not qualify for a business loan. Also those businesses that have an unsteady cash flow or those that are considered unhealthy to the society will not be able to qualify for a business loan.

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