Having access to business loans and lines of credit can tremendously help to expand and grow a company much faster. However, the major problem is that most business owners simply don’t understand how to qualify for a business loan. Making it impossible to receive business loans or lines of credit.
Business Loans Blueprint
While there are many factors to qualifying for a business loan, the specific qualifications needed will depend on several factors such as:
- Business Loan Type
- Business Industry
- Years In Business
- Business Owner’s Personal Credit Score
The two most important factors when applying for a loan involve:
1) Guarantor’s personal credit report.
2) Business bank statements.
Let’s breakdown what banks look for to approve business credit loans.
When is comes to the credit report file, banks look for reasons to decline a business loan. There are certain qualifiers that can make or break a business credit loan request.
The credit score value is delivered by credit reporting agencies. The main credit reporting agencies are Experian, Equifax, and TransUnion.
Experian unlocks the power of data to create opportunities for consumers, businesses and society. At life’s big moments from buying a home or car, to sending a child to college, to growing a business exponentially by connecting it with new customers. They empower consumers and our clients to manage their data with confidence so they can maximize every opportunity.
Equifax is a global information solutions company that uses unique data, innovative analytics, technology and industry expertise to power organizations and individuals around the world by transforming knowledge into insights that help make more informed business and personal decisions.
TransUnion mission is to help people around the world access the opportunities that lead to a higher quality of life, by helping organizations optimize their risk-based decisions and enabling consumers to understand and manage their personal information.
How credit reporting agencies work is that they maintain data on your entire credit file and your personal credit score value. Credit scores rang from 400-800+. Many times a credit score is not ranked until the score reaches 500 or more. Most business credit loan lenders like to see a credit score of 720 or higher.
However, there are some exceptions when it comes to getting approved with a score lower than a 720. Some lenders will take scores as low a 500. In this instance, this is considered really bad credit. When lenders approve business loans with bad credit scores, they also charge hefty fees and much higher interest rates. It’s highly recommended that you fix your credit first, in order to get the best rate and terms before applying for business loans.
Additionally, there are other factors that impact getting approved for business loans.
Number Of Open Accounts
Ideally, you want to have at least one mortgage account and at least one installment loan such as an auto loan. You also will want to have 3-5 revolving credit accounts all in good standing. A credit account that is good standing should have no 30 days or more late payments on the account. Lenders also like to see credit accounts that are seasoned for at least 12-24 months and with good payment history. This will show that you pay your bills on time and lenders love this.
Having a good payment history demonstrates whether or not the borrower will pay the debt on time constantly. Credit reports will show late payments from 30 days, 60 days, 90 days, and 120 days. If a loan or credit account is more that 90 days late then that loan is considered in default and the lender may place the loan in collections. Having any days late on a credit report is a huge red flag for most lenders and will almost surely get a business loan request denied.
If you see any late payments on your credit report it is best to address them and see what you can do to resolve that issue before applying for any business loans.
In addition to having a certain amount of open credit accounts, the proper balances on utilization on those credit accounts must not be maxed out. The amount of credit debt in relation to the credit limit is what is referred to as utilization.
Lenders will look at this qualifier to see how responsible you are with your credit before approving business loans. For example if you have a $1,000 credit card and you maxed out your card and only make minimum payments this is a serious red flag to lenders. On the other hand, if you have a $1,000 credit charge and make monthly charges of up to $300 and you pay off the balance every month, this shows that you can manage your credit well. Lenders love that credit is used wisely and paid back often. For excellent utilization make sure your revolving credit account shows no more the 30% of the total credit limit is being used. So evaluating the previous credit example of the $1,000 credit limit, you do not want to have a balance of no more than $300.
Lenders will look at the number of inquiries on your credit report to help determine the credit risk. Typically, you don’t want more than 5 inquiries per year on your credit. This becomes a problem if you apply for an auto loan, especially with the dealership since they blast out your credit file to multiple lenders…therefore stacking your inquiries to the point that it hurts your credit even if you do get approved for the auto loan.
Note a better way to get an auto loan without pulling your credit so much is to go through your bank or local credit union. They will only pull your credit once and you can also receive a check to buy a car once you are pre-qualified and approved. This will have less impact on your credit file without a surge of inquiries.
If you have more than 5 inquiries on your credit report, it is strongly suggested that you work to have those inquiries removed before applying for business loans. Remember you don’t won’t to give the bank any reason to decline your loan request. Having too many inquiries is a primary reason for lenders to reject approving a business loan.
Derogatories are negative data showing in your credit file that reduces your credit rating and effects your credit report and credit score very negatively.
Examples of derogatories are:
- Late payments
- High Credit Balances ( Maxed Out Accounts)
- New Accounts (Yes too many new accounts will reduce your credit score, You should open no more than 2 new accounts a year)
- Judgments (Public Record)
- Liens (Public Record)
- Bankruptcy (Public Record)
- Tax Liens (Public Record)
- Too many closed accounts ( If you have lots of closed accounts and too few open accounts this is also a bad thing)
Any one of these derogatories listed above on your credit report can result in a denied business loan request. It is always best to address these issues or wait until they drop off your credit report before applying for business loans. Using a system like Credit Disputer Secrets is a fast and easy way to fix credit issues.
Lenders will also take a look at the last 3 months business bank statements. They are looking for strong cash flow of at least $10K per month or more with 5 or more deposits per month. This is important as this will show that your business has the cash flow to pay back the business loan.
It is best to show that you have no overdrawn balances or anything negative appearing as if you can’t manage your business cash flow.
NSF (Non Sufficient Funds)
When applying for a business loan it is best not to have any NSFs showing on your business bank statement. The rule of thumb here is not more that 7 NSFs in one month and no more than 12 within 3 months. However, it’s best to not have any NSFs, you do not what to give a lender any reason to say no….so it is best to really manage your business bank account so that you don’t show any NSFs showing at all ever.
Other Important Factors
Other factors that lenders look for to approve a business loan are….
Length of time in business
Generally lenders like to see a business history of at least 2 years with some expectations. They will also expect a business to be operating in a good sustainable industry. Even if the business is new it still needs to be able to show very strong cash flow of at least 3 months if the business is one year old or less.
There are certain business industries that lenders will not lend to at all, while other industries they are more prone to lend money.
Below is a list of the best industries for getting business loans.
These are business industries that lenders are less likely to approve business loans.
Now that you better understand how-to qualify for business loans. Let’s review the varies types of business loans available. This will help you to further determine what is the best type of loan for your business. Let’s breakdown which best types of business loans are available today.
Lines Of Credit
This type of loan is a unsecured credit account that works like a credit card. You get approved for a set amount that you can use over and over again each time you pay down the balance. It it usually the best option for most business owners and offer the least amount of fees and the lowest interest rates.
Business lines of credit typically require excellent credit scores from 720 and up. Additionally, you also need strong business cash flows from $50K per month and up with no derogatories on the personal credit report nor NSFs showing on the bank statements.
Business Credit Cards
These types of credit cards are much easier to get because they are usually offered with low credit limit amounts from $5k-10k. Interest rate can vary depending on the business profile and credit score of the primary borrower. These are a great option to use to build your business credit.
Term loans are business loans that are offered at a set loan amount to be paid back with a set amount of time from 2-5 years. They are much like an auto loan, except they are for businesses. These too are usually offered in lower amounts and they are a good option to build business credit.
Invoice Financing (Factor Loans)
Factor loans have become more and more popular over the years. This type of business loan does not require your personal credit score for approval. Instead lenders will lend off your business accounts receivables. This can be a good option for businesses who have a lot of transactions with a lot of accounts receivables with good balance amounts.
There are also even lenders that will lend against business credit sales. Though this option can be very expensive in regards to lender fees.
Micro loans are loans that are smaller than $100,000 and are based on your credit score mostly. Many newer businesses opt for this option.
SBA business loans are popular loans that are backed by the Small Business Administration. What that means is the SBA will pay back the loan in case the business defaults on the loan. This loan process tends to be more detail and more documentation about the business financials and personal credit profile is often needed. SBA business loan do however offer the best rates and terms if you are willing to deal with the application process.
These are loans offered to finance equipment that is needed for a business like a medical office or manufacturer company, etc. Credit scores and bank statements will be needed to qualify for this type business loan. They are much like a term loan, except they are secured by the equipment as collateral.