You know that when you apply for a small business loan, the lender is going to ask a lot of questions. But what do they really care most about?
When it comes to small business financing, lenders often look at three numbers:
- Time in Business
“Every lender is different, and every loan product is different,” warns Ben Westerman, Credit and Lending Manager at Nav. He and his team have helped hundreds of entrepreneurs seeking small business financing. But still, there are some common themes in terms of what lenders evaluate. He says most look at those three numbers, and you should, too.
Time In Business
It’s difficult to get funding if your business is less than six months old, and some lenders set the bar higher, by requiring at least one or two years in business. That’s not surprising; the failure rate for young businesses is pretty high.
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That means if you are just launching your business and need capital, you may need to think a little more creatively. Consider business credit cards, for example, which are often available to new businesses as long as the owner has strong personal credit scores. Microloans and crowdfunding are other options that may work for start ups. (Nav offers a free guide to small business financing that details lender requirements.)
Ever watched “Shark Tank,” the popular TV show where entrepreneurs pitch their businesses to professional investors? One of the first questions the Sharks often ask is, “What are your sales?” Healthy sales (a.k.a. revenue) are an indicator your business is likely to succeed.
Similarly, many lenders will ask for information about your business’s revenues, and may even ask you to provide copies of the most recent 90 days of business bank statements, or provide access to that information to the lender. Most lenders are looking for revenues of $7,000 to $8,000 per month or more, says Westerman. He says this requirement tends to trip up business owners who haven’t taken the time to separate their business and personal accounts.
“It’s a common hurdle,” he says, and encourages business owners to open a separate business bank account and use that for all business-related transactions.
Everyone’s heard of credit scores, but many entrepreneurs haven’t heard of business credit scores, or they don’t understand how their credit scores impact their ability to get financing.
Don’t be discouraged if your personal credit scores aren’t stellar. High credit scores aren’t needed for all types of financing. In fact, some alternative lenders have minimum personal FICO credit score requirements of 550 or less, says Westerman. Often, what they are more concerned with is whether there are any open outstanding issues, such as unpaid collection accounts or a bankruptcy that hasn’t been discharged (completed).
In addition, Westerman says many borrowers don’t realize that a FICO LiquidCredit SBSS score will be used to prescreen most SBA loan applications. The FICO SBSS score takes into account the personal credit score of the owner(s), the credit score of the business, and financial information may be included as well.
Will Online Reviews Hurt Your Chances?
While there has been talk about how social media, including Facebook followers, online reviews, etc. may affect a small business’ ability to get credit, it hasn’t yet trickled down to mainstream. “We don’t see it much yet,” says Westerman. Much of the talk about this and other types of “alternative” data is focused on identifying businesses who could be good credit risks, but never get the opportunity to prove it.
One way to increase your chances of getting approved is to use Nav’s Marketplace which will provide you with your MatchFactor for various loan options. This proprietary algorithm identifies which loans you are most likely to quality for. It’s free and won’t affect your credit scores.