Why Time in Business Matters to Lenders

Why Time in Business Matters to Lenders

Why Time in Business Matters to Lenders

If you’re a business owner, you know time is a precious resource. But did you know it can also play a major role in securing financing? That’s because many lenders include “time in business” as a factor when evaluating applications for financing.

Lenders often require that a business be established for a minimum number of months before it is eligible for small business loans.

“Time in business is an important factor lenders and banks look at when evaluating financing applications,” says Katherine Li, head of product marketing at BlueVine, which provides small business owners with flexible lines of credit. “Businesses that have been operating for more than a year generally have a stronger chance of being approved for small business loans. That’s because by the one-year mark it is assumed that you’ve already achieved some kind of momentum and are more likely to be able to take on more debt obligations.”

Time In Business General Guidelines

How long does your business need to operate before it will qualify? Here are some general guidelines, though it’s important to keep in mind that every lender has its own standards:

  • Business credit cards – 1 day in business
  • Equipment financing – 6 to 12 months in business
  • Accounts receivable financing – 3+ months in business
  • Business lines of credit – 6 to 12 months in business
  • Term loans – 12 to 24+ months in business
  • SBA loans 2+ years in business is preferable

The average number of months in business required by lenders of Nav’s options is 24 months. A few lenders do not have a minimum time in business eligibility requirement, some are much shorter, and the longest is 84 months. (Nav helps match small business owners to financing options and works with a wide variety of lenders offering various types of financing.)

Tips For Success

Here are some strategies for ensuring that time in business is a positive factor, and not a hurdle, when it comes to growing your business.

1. Start early

If you are thinking about starting a business, consider launching it sooner rather than later, even if you start small or start it as a side hustle. That’s what Kitson Walker did when he started his facilities support service company, EBS-4U Inc. He started it while he still had a full-time job, knowing that the sooner it was established, the sooner he would meet the required time in business if he needed financing.

If you already have an existing business before you get to work officially, you’re two steps ahead from the start.

2. Make it official

Creating a formal business structure such as an LLC, C-corp or S-corp will require you to register your business with your state. That will not only give you an official start date for your business but it can also put your business on the radar at business credit reporting agencies. They often collect business registration information from Secretaries of State or state Departments of Corporations and add new businesses to their commercial credit reporting databases.

If you decide to operate as a sole proprietor, registering your business name and/or getting a business license through your state may help serve a similar purpose. Ideally, though, you’ll want to consider establishing a business entity as soon as possible. And a business plan, even an informal one, is a valuable tool no matter which type of business you operate.

3. Get a business bank account

If you haven’t already opened a business bank account, consider doing so. Having a business bank account can help establish time in business even if you haven’t Incorporated. Plus it might just help you get financing. A Nav survey of small business owners found that the majority — 70% – of business owners without a business bank account were rejected for financing.

“Most alternative lenders will work with you as long as you have a bank account dedicated to your business and can show a consistent revenue stream,” says Ben Westerman, credit & lending manager at Nav. Borrowers’ annual revenue, cash flow, balance sheet, and other financial statements are key aspects to your eligibility for most loan options as well as time in business.

4. Don’t leave it to chance

If you start your business as a sole proprietor and later decide to incorporate it, make sure you don’t lose the time in business you’ve already established. If you are not proactive, you will essentially have to start all over again which may cause you to lose out on valuable opportunities.

Westerman advises business owners who are incorporating a business they’ve been running as a sole proprietorship to consider filing a name change and transferring the EIN — by notifying the IRS and state agencies (such as the Secretary of State or business licensing agency) — rather than starting all over again as a brand new company. “Business owners oftentimes will just start a new LLC without transferring their EIN (Employer Identification Number),” he warns.

5. Build business credit

Any entrepreneur, startup, or small business owner can benefit from establishing accounts with lenders and vendors that will report payment history to the main business credit bureaus. This may help you start to build a business credit history and business credit scores, which are basically your business’s repayment track record. Some lenders will check business credit and may look at the information the business credit bureaus report to confirm the time in business you stated during the application process. It may be harder to qualify for funding with bad credit while a business’s good credit can make them stand out.

Additionally, you may get lower interest rates and better repayment terms when you can prove your business’s creditworthiness. Thus, your monthly loan payments may decrease and you’ll have more cash flow and working capital to use toward your business goals.

You can get business credit cards and vendor accounts for a brand new business  as long as you otherwise qualify. (Here are three vendors that will help you build credit.) For small business credit cards, for example, you typically must have a personal credit score in the mid-to-high 600’s or above, and adequate income from all sources.

6. Update lenders

If you have obtained credit in the name of your business, whether it’s a small business credit card, a vendor account, or any other type of financing, make sure you notify those business lenders if you subsequently incorporate and change your business name. “Making sure they have the new name and address (if applicable) is key,” warns Westerman, adding that if you don’t correct it, information may be reported to the commercial credit bureaus under the old business name or address. The previous business name may not get associated with your new business and rob you of valuable credit references.

How Long Do You Have To Be in Business To Get a Loan?

As mentioned, a time in business loan requirement is something you have to consider when you’re filling out a business loan application for small business financing. The answer depends on factors like the financial institution, the type of business loan, and the loan amount you’re applying for. 

Overall, though, having more than one year in business makes you much more likely to be able to qualify for a bank loan. Traditional lenders may want to see that you are established and can make your monthly payments before they will consider you a qualifying candidate. On the other hand, if you’re applying for equipment financing, invoice factoring, a merchant cash advance, a microloan, or a line of credit, you may be eligible after six months in business. These short-term loans may have fewer requirements, or may allow you to put down a personal guarantee to secure the loan. 

If you’re looking for an option you can use from day one of running your business, online lenders and business credit cards may be more flexible. Credit card providers may be open to considering applications from the beginning of your business operations.

This article was originally written on May 9, 2018 and updated on September 9, 2022.

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