Banks will review every single loan application but most business owners have no idea what is actually reviewed. There are many different things that need to be understood before you even submit your loan application. Understanding what banks review is definitely vital. Those 3 components that have to be known are:
- Credit history
- Income
- Collateral
Business Credit
Business and sometimes personal credit history will always be considered before approving a loan. Basically, individuals that own over 20% of one company are investigated. If low credit score is in place, there is a pretty good possibility the loan request will be declined. This is only not the case when business credit history is particularly high.
It is important to be familiar with the credit report that you have as an individual, not just what the business history dictates. Get reports from credit bureaus so that you can see if they are correct. If errors are identified, just report them.
Income
Loans are approved when it is proved that the borrowers have the ability to pay them back. This is important since income statements need to be provided. With small business loans this is great since it is all about reports that can be shown. If the business is new, this is not possible. In this case the business loan is approved based on potential income. Reports can be presented and you can prove that the startup has the potential of generating income in the future.
Keep in mind that income reports should cover both current and future potential. Many business owners simply present one report and do not offer substantial proof so the lender has no way to assess financial stability. For instance, if you have a history of having to pay out damages for a workers compensation lawyer, this will impact your approval possibility.
Collateral
Current financial status and credit reports can just highlight some things. These are documents that rely on past results. This is why when the banks do not get enough information and the amount that is requested is too high, collateral is required. Different collateral types are possible, including real estate, equipment, inventory, business assets, and receivables.
Collateral requirements are going to vary from one lender to the next, usually based on loan size, type, and how proceeds were used. Generally, collateral is necessary as an extra caution. It is not seen as a repayment source.
Final Thoughts
To sum up everything, in order to qualify for the business loan, you need to:
- Ask for the amount that you actually need, not more.
- Show that there is a purpose behind the loan.
- Prove that pay back is possible through current or future income statements.
Keep in mind that these are just some general parameters that are going to help the business owner to increase the possibility of being approved for the small business loan. Many others can be mentioned. It is really important to talk with the representative of the lender to see exactly what situation you are in. In many situations, you just need to fix some things or bring extra documents in order to be approved for a denied business loan.
