Lenders are going to looking at a number of factors to determine your eligibility for a loan, including your personal and business credit scores, your business banking information, personal and business tax returns, P&L statement and more.
If this seems overly complicated, never fear. While you can’t make all of these factors perfect overnight, you can exercise control over some, which will greatly improve your chances of getting the financing you need to make your business strong. Let’s take a look at five things you should definitely avoid before applying for a loan.
1. Missing a Payment
Don’t miss a payment on your personal or business credit cards, vendor accounts or any accounts that report to personal or business credit reporting agencies.
Payment history is the most important factor in both personal and business credit scores. Although it varies by score, payment history accounts for about 35% of your personal credit scores and 50% of your business credit scores. Just one late payment can bring down your scores significantly.
Most lenders are going to look at least one, if not both, credit scores. Most financing types will require you to meet a minimum credit score requirement — the SBA’s most popular loan program — the Advantage loan program, for example, has a minimum FICO SBSS score of 140 or above.
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2. Making Large Purchases on Your Credit Cards
Large purchases can also affect your credit scores if you’re not carefully paying them off. This applies to purchases made on both your personal and business credit cards. Large purchases run up your credit utilization, which is an important factor influencing both personal and business credit scores.
Here’s a tip if you need to make large purchases on your credit cards: find out when your card provider reports to credit reporting agencies, and pay off your balance before that date so your high credit card balance is not reflected on your report. Often, this is the date your statement is issued.
3. Letting Your Business Bank Account Dip Below $1,000
Lenders like to see that you have enough free cash flow available to meet current debt obligations. A low balance (generally below $1,000) is a sign to lenders that maybe your business isn’t in the best shape financially.
Obviously, negative balances are even more of a red flag. Negative balances tell a lender that your business doesn’t have enough money in the bank to cover loan payments.
Here’s a tip if your business account balance is low: transfer a cushion of cash into your account, or secure a line of credit from your bank so your account doesn’t dip too low during cash-flow emergencies.
4. Applying for Certain Types of Loans
A Merchant Cash Advance (MCA) has been described as a “payday loan” for small businesses. How it works is an MCA provider pays a one-time lump sum, often instantly or the same day as the application, to a merchant in exchange for a percentage of future credit or debit card sales.
Fast money comes at a price, however, and MCAs usually charge high interest rates of 50% or more. If a business has outstanding MCAs it’s a sign to lenders of financial volatility, similar to the way a personal lender might view you as an individual if you’ve take out multiple payday loans.
Here’s a tip to avoid taking out an MCA: Consider applying for a business credit card before any potential cash emergency so you’re prepared should that time come.
5. Not Checking Your Business Credit
You’ll want to check your business credit scores and reports before you apply for any business financing so you know where you stand. If your scores are bad, and making a couple of small moves like paying off a credit card or asking for a credit limit increase will improve them, you could score better interest rates and terms. (You can check your personal and business credit scores for free on Nav.com.)
Also, checking your credit report ensures the data is accurate and up to date. Some negative items may still be on your report causing headaches despite the fact they should have dropped off. UCC filings are a good example of this.
When you take on financing that requires collateral, the lender places a legal document called a UCC filing on your business credit file, which signals to other creditors that they have a legal right to your collateral specified in the filing if you fail to pay your bills to the lender.
If you already have a loan that required collateral and are looking for another loan, you’ll find that many lenders are unwilling to lend to your business if they are second in line to the creditor that placed the initial UCC filing. UCC filings can last for 5 years (or more if the lender files a continuation of the UCC).