Small business loans are notoriously difficult to apply for. Firstly, lenders will run background checks on all listed business owners, meaning that even before the business side of things comes into play, it is like applying for a complicated personal loan – where the typical pitfalls of applying for a personal loan must be navigated by all those involved. If successfully navigated, a multitude of additional factors come into play regarding the company or prospective company that small business loan will ultimately serve.
The main things lenders will look for:
- Credit score is obviously the main factor, but many fail to consider that lenders will request a detailed analysis of both the financial history of the business and that of the perhaps multiple owners involved in applying for the loan.
- Years in business is another key factor, since many banks or other lending institutions will be hesitant to invest in businesses that are yet to or have only recently found their feet. Two years is a common minimum figure, though some lenders may want to see more.
- Annual revenues are important in that it is the main piece of evidence held by a lender showing the ability of your business to repay the loan or to adhere to a repayment schedule.
- Collateral is often required when applying for a small business loan, though will vary depending on the type of loan that is being applied for. Examples might include a piece of real estate or industrial equipment.
How credit score is evaluated
Again, credit score is critical when not only for a personal or home loan but also a small business loan. Many will have an idea of whether a particular credit rating is good or bad, but all that is important is how the lender will perceive it. Of course, there are some lenders that weight credit scores differently than others: banks, for example, will impose a lower risk threshold than other lenders. In general, this is how the different levels of credit score are perceived by lenders:
- 800 or more is generally considered to be an excellent rating, involving no late payments or collections on the credit report. Such a high rating would also indicate a good past relationship with the credit rating bureau.
- 750-800 would also indicate that the business and its owners have no late payments or collections on their report. However, they might hold less of a history with the credit rating, but would still qualify for low rates.
- 700-750 would be considered a good rating that might include one or two late payments in the past but nothing recent and nothing of note. Still, it would qualify for a fairly good rate at any lender on the market.
- 650-700 is a rating that will probably involve some recent late payments or difficulties in adhering to a payment schedule. A decent rate might well be obtained, but it is a rating that can be repaired with a little work.
- 600-650 would be considered a bad rating by most lenders, including struggles both now and in the past. Applying with such a low rating will result in being offered high interest rates, though some lenders might offer a better rate than others.
- 600 or less would be a very bad rating, with payment issues ranging from the past right up to the present. The applicant will be offered high rates in every corner of the lending market, and should focus on repairing their credit.
Small business loans on bad credit
So, what if an entrepreneur or group of entrepreneurs is struggling under the weight of a bad credit rating – or, one of the lower ratings listed above? No score will render borrowing money an impossibility, but it is perhaps best in certain situations to avoid a high rate and focus instead on improving or repairing one’s credit. Many different steps can be taken to do so, a few of which are listed below:
- Ensure that your credit report is correct, up to date and reflects your borrowing power. Old payment difficulties, or really any negative information that is over 7 years old shouldn’t be included.
- Obtaining a major credit card can help you build your credit rating. An entrepreneur or prospective entrepreneur could obtain such a card and use it exclusively for this purpose, building their rating for the future.
- Similarly, arranging automatic payments on a card or on an existing loan can be wise if one is to avoid payment difficulties. Often, late payments are the result of distraction rather than the ability to pay on time.
- If you are unable to pay off loans or credit cards quickly or on time, consolidating your debt is often a good option.
- Try to avoid closing accounts or allowing them to close automatically because of lack of use. This may reflect negatively on your credit report and can be avoided with the simple occasional purchase.