Many businesses tend to undergo certain financial constraints in the course of their development most of the times. When such times come knocking, many entrepreneurs consider approaching lenders and alternative sources of financing. There are several lenders ranging from banks, micro finance institutions as well as other lenders such as crowdfunding sites available to the entire business industry.
However, not all businesses are able to access business loans. This is because of several factors that many lenders put into consideration. Unfortunately, not many businesses meet all the requirements that financial institutions need in order to grant them business loans or lines of credit. On the same note, some business owners do not know factors used to determine the business creditworthiness. Here is a look at what lenders look for before extending any form of credit to a small business entrepreneur.
Credit Repayment History
This is a very crucial factor that any lender uses as a priority before extending credit to any business. In order to gauge your creditworthiness, lenders look for a credit report from the credit bureaus. The credit report contains information such as your credit accounts, the credit inquiries that your business makes and lastly your history of repayment.
On the credit report, some of the most important indicators that lenders look for is how many times you have defaulted in payments as well as any history of bankruptcy. When you have a very poor record of credit repayment history no lender will give you any form of credit.
This means that it is good for any business to try and pay all their bills on time. With a very good credit repayment history, the lender's confidence will be boosted with the belief that indeed you will repay back their money on time without failing. Thus, from today, make sure that you repay all your bills on time to increase your chances of getting business loans or lines of credit from different lenders.
Your Business Credit Score
This is also another big factor that lenders use to determine the creditworthiness of your business. The better the business credit score for your business, the higher the chances of being granted a loan from any given financial institution. If you are wondering how money lenders get to know your business or at times your personal FICO score? Here is how.
Your business credit report is a document which contains different information which is used by credit bureaus when it comes to the calculation of either your business or personal score. The factors considered in calculating the credit score include credit utilization ratio, how often you open new credit accounts, credit inquiries and how fast you clear your money credited to you by your previous lenders.
If your business credit score with Dun & Bradstreet is between 75+ then you are categorized to be having a high score which places you at a better chance for your loans to get approved with ease. This means that as a business owner, you have to work extra hard and raise your score if you really need your loans to be granted by lenders within a very short period of time.
Your Business Financial Standing
Many financial institutions such as banks and other financial institutions often demand for different financial institutions like the business last year's financial statements, balance sheet and an interim financial statement of the recent months. Other financial statements that you need to have include the income statement and cash flow statement.
These statements will give an insight about the financial position of your company or business. If your business is very stable, then many lenders shall be able to grant you credit since they will have confidence that indeed your business has the needed ability to repay debts. However, if your business has so many debts, no one would wish to risk their money on you.
Therefore, it is good for business owners to ensure that the business they are running is very stable financially. There are several ways one can reduce cash outflow in a business including but not limited to reducing the number of employees, delaying payments to lenders, leasing of property, buying used equipment etc. All these will reduce expenses and eventually unnecessary costs for a business.
When you are applying for loans from different institutions, most of the times you need to have collateral pledged as security. This is an asset that lenders may sell to recover their money just in case you default in loan repayment. Most of the assets include real estate, land and machinery equipment.
This means that any business which has valuable assets can have their loans approved within a short period. However, remember that at times, a business can go for unsecured loans though this needs a very stable business with a high credit score and good repayment history.
Holding other factors constant, any business with a valuable piece of collateral will be given a huge sum of money in the form of a loan compared to a business whose value of security assets are very low. If you have collateral whose value has depreciated, then it is good to apply for a small loan which matches the value of the collateral.
Your Debt to Income Ratio
When examining business creditworthiness for your business, many lenders take into consideration the debt to income ratio of your business. Any business owner can calculate this ratio by taking the total of their monthly obligations and dividing them by the total monthly income generated by the business. This ratio should never exceed 36. Mathematically, the lower the ratio the better.
This means that any business whose debt to income ratio is very high has a higher risk to forfeit in payment. This is a red alert to lenders not to lend money to such a business. Thus, it is very important for business owners to pay their debts in order to lower this ratio to a minimum point possible.
If you want lenders to give you loans or other forms of credit from time to time, you need to make your investment in building a creditworthy business. Make all your credit repayments on time and improve your business' credit score as well as have a credit repayment history with a good reputation. Also, it is advisable to clear your debts and work on your cash inflow so as to have strong financial statements.