When you apply for a loan you probably assume the lender will check your credit reports or credit scores. You know that bad credit can hurt your chances of getting a business loan. But what about your bank accounts? How can they impact your application for a business loan?
Here are five ways your bank account can hurt your chances of getting approved:
1. You Don’t Have a Business Bank Account
To get a business loan you should have a business bank account. It also helps to have established business credit. If you just have a personal bank account and personal credit, any loan you get will be based on your personal qualifications— which means you’ll essentially be getting a personal loan, not a business loan.
Lenders often want to see at least a year’s worth of business bank statements when evaluating a business loan application. Two year’s worth is even better and will often be requested if the business is two years old or more.
2. Your Business Doesn’t Make Enough Money
When you apply for a personal loan such as a mortgage or car loan, the lender will look at your personal income to see if you qualify. Similarly, if you apply for a business loan, the lender will want to know how much revenue your business is bringing in. Minimum income requirements can range from a few thousand dollars a month to six figures or more annually. In addition, some lenders will take into account the income of the business plus the owner’s personal income. If personal income is used to qualify for the loan, the lender will often require a personal guarantee which allows the lender to try to collect from the owner’s personal income or assets in the case of default.
3. Cash Runs Low At Times
Not all lenders review bank account information but when they do, they are likely evaluating that information in a variety of ways. One thing they will look for is the number of days your bank account dips below a certain level (for example, $1000), as well as the number of times you’ve dipped below the available balance and overdrafted your account. Every lender sets its own standards, but generally low balances for more than a few days a month, or a pattern of overdrafts, can be a major red flag to lenders. If you can park a $1000 (or more) in your account and not touch it, you may avoid having this factor hurt your chances of getting a loan.
4. You’re Relying On Too Few Income Sources
In the investment world, diversification is a strategy to reduce risk. The same thing is true when it comes to how lenders review the deposits in your bank account. Before it lends money, the lender wants to see that your business isn’t likely to run into serious financial trouble if you lose one of your clients. In fact, a lender might ignore revenue from a significant client— unless it’s considered to be low-risk, such as the federal government or a very large and well-established company your business has been working with for a long period of time.
5. Your Debt Payments Are Too High
Lenders often look at business credit reports and scores to evaluate credit risk. But they may also look at business bank accounts to see whether the business has enough money to cover debt payments. Many banks use something called a Debt Service Coverage Ratio (DSCR) to make this judgment. The DSCR is generally calculated like this:
DSCR: Net operating Income/Debt Service
At the most basic level, most banks want to see a DSCR of 1.15 to 1.35 to ensure there is enough money flowing into your business to cover debt levels.
Just as strong business credit can help you get business financing or a loan, a strong business bank account can also increase your chances of getting a “yes” when you apply.