When you are running a business, there may be times when it gets bad enough that you may have to consider a small business loan. Even if the business doesn’t have a problem, perhaps you are thinking of an expansion. Whatever the reason, a loan can help see you through when times are tough. Submitting an application is one thing, but will you get it? There are many things a lender needs to consider before handing over any money to you, so let’s take a closer look at some of the things a lender will consider when you apply for a small business loan.
1. Credit History
When you want to get a small business loan, lenders will often look at the past credit history. In the event your business is new and there really isn’t any credit history for a lender to derive information from, then they may look at your personal credit history. This is normal and you cannot really blame them. After all, they are risking their money. If they are going to lend you the money, then they want to see how you managed to deal with previous obligations. If they realize that you managed to meet deadlines in the past, they would be more inclined to approve the loan.
2. Ability To Pay Back
If a lender looks into your past and realizes that you had managed to pay back previous loans, while this is definitely a good thing, they will still want to know what your current situation is like. For example, is your business making enough for you to pay the lender on a monthly basis? If it does, then the likelihood of being approved becomes that much greater. However, if your business is barely making it, you will struggle to pay the lender. Lenders may set a minimum amount as a requirement. If you struggle to meet this requirement, you may not be approved.
3. Reason For The Loan
A lender will want to know what the loan is for, or how you intend to use it. A lender would be more willing to give you a loan if you intend to use the loan in such a way that it may increase the volume of your business. For example, if you need it to make some renovations to add some space where you intend to set up a new product that is guaranteed to make money, then they will be willing to offer the loan to you.
4. Debt-Income Relationship
Lenders want to know how you intend to organize your finances so that you can manage to pay your loan and therefore, they want to verify your income. When paying your loan, a lender does not want you to go through a difficult time. So, they would like to know if you can keep up with both your loan payment and your usual operating expenses. You may have even put up collateral, but no lender wants to rely on foreclosure to get paid back. If you can show that it’s very likely you can pay back the loan and not ‘suffer’, then chances of approval are greater.
Once you repay your loan, the chances of getting approved in the future by the same lender significantly increases. Keep this in mind, because you never know when you can use extra funds. If you’ve worked with someone in the past and all parties were satisfied, it will be easier next time round.