While a bank certainly isn’t the only place where a small business can apply for a loan, they still serve as one of the main sources of funding for small businesses today. Obviously, banks want to ensure that they are able to get their money back from what they lend out and therefore they employ a pretty comprehensive application process for those who are looking to apply for loans. While the exact requirements for every bank are different and will require some research on your end to make sure that you qualify before you apply, many of them look at the same five things when considering your application for small business loans. It’s important to know what banks are looking for when applying for funding so that you are able to potentially supplement weaker areas of your application with more positive factors to increase the chances that you are approved.
The first think that banks look at when considering small business loans is your credit scores – both your personal credit score and your business credit score. One of the most important things that you can do when in the beginning stages of starting your business is to separate your business finances from your personal finances, and this is exactly why. A good business credit score will show the lender that you practice responsible money management and are generally trustworthy with money that is lent out to you. Like a personal credit score, a business credit score is based on determinants like your business’ history of loans and payments to lenders, your business size, your business revenue, and even the industry that your business is in. Overall, you want to make sure that you are making your payments on time, that you don’t have too much debt that exceeds your revenue, and that you don’t present a potential risk when lending out money.
The next thing that banks look at when applying for small business loans is your small business plan. You might think that as a small business, you don’t need to have a real business plan that is physically written out – but this isn’t true! Not only can a good business plan help you when it comes to securing funding, but it can also help you out in several other aspects when running your small business. A solid business plan shows the banks that you are serious about your business and have thought about all of the important components of having a successful small business. Some of the sections that you should have in a business plan include an executive summary, company description, products and services, market analysis, strategy and implementation, organization and management, and your financial plan and projections. Even if the lender doesn’t necessarily require that you submit a business plan with your application, it’s a good idea to create one and submit it anyway to show that you are an educated and responsible business-owner who will also be responsible with their money.
Another thing that banks look at when considering a small business loan application is the potential collateral of your business should you fail to pay back the loan. Although this is clearly a worst-case scenario, the bank needs to make sure that you will somehow be able to come up with the money to pay them back from your assets. Some examples of assets that might be considered are real estate, equipment, vehicles, and accounts – although these will vary depending on the type of business. Depending on how many assets your business has, you also might have to pledge personal assets as well because most banks will only lend up to a certain percentage of the value of the asset – and many small businesses don’t already have that many assets which is why they need the loan in the first place!
Speaking of personal assets and finances, this is another thing that banks look at when dealing with small business loan applications. So not only is your business credit score and assets important, but so are your personal credit scores and assets. A good personal credit score over 680 will make it more likely that your application is approved because you have a positive lending history by making payments on time and keeping your debt low. A bank will also likely want to review all of your personal financial details as well – things like social security numbers, net worth, personal assets and liabilities, etc. You may have to pledge personal assets like your home equity, in order to get approved for a small business loan when your business doesn’t have many assets.
Age of Business
Another thing that banks look at when considering small business loans is the age of your business. This is something that many people don’t really think about before they apply – but banks are really hesitant to lend money out to businesses that have been in operation for less than two years. The longer that you have been in business, the better your application looks to the bank. Unfortunately, this can be really hard for new business owners who are looking for money to get their businesses started. The good news here is that there are other lenders out there like Seek Capital that have more flexible application requirements, lending options, and repayment terms than traditional banks.
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