Launching or growing a small business involves a lot of moving parts that all require tracking. Along with keeping your customers happy, you're busy managing expenses, dealing with logistical requirements, coordinating employees, and much more.
If you're applying for a small business loan to grow your business, your list of action items is even longer. You need to finalize your business plan, get all your financials in order, shop for the perfect loan product, complete your application--it may seem like the list grows every minute.
Let's pair down your funding to-do list by honing in on the four essential factors that small business lenders care about most when reviewing your loan application.
1. Annual Revenue
You're in business to make money. Or at least, you should be. As such, your annual revenue is a major indicator to lenders of your eligibility for a business loan. Lenders like to see that you have enough cash coming into your business to cover your loan payments, along with the rest of your company's operating payments.
Typically, lenders want to limit your total loan amount to less than 15% of your business's total revenue, ensuring that you'll be able to make your loan payments in case emergency expenses come up.
2. Time in Business
Of course, in order to even have an annual revenue, you need to have been in business for a little while. This is one of many reasons that, like a fine wine, your business's loan options get better with age. Small business startup loans are notoriously hard to secure. Lenders know that 50% of small businesses fail within the first five years. The younger your business is, the less likely you are to make it for the long haul.
In general, businesses that have been operational for more than two years are typically the most fundable. If you've made it through your first year of business, you likely still have options. But if you've been in business for less than a year, you may have a harder time being approved for a small business loan.
Unfortunately, unless you happen to have a DeLorean handy, this one is pretty much out of your control. If you're struggling to secure funding for your brand new business, the best you can do is wait and apply again when your business has a little more time--and revenue history--under its belt.
3. Average Bank Balance
Even with strong annual revenue numbers and enough time doing business to work out the kinks in your business model, it's inevitable that unexpected expenses come up. Your roof leaks, or you get a bad batch of inventory, or a client doesn't pay--any one of these factors can tank a business unprepared for the unexpected. That's why lenders like to see that you have enough padding in your bank account to bounce back from a rainy day.
Your average bank balance tells your lender three things: the health of your cash flow, the profitability of your business, and the financial cushion you have on hand. Even if your sales numbers are fantastic, a low or even negative bank balance will raise eyebrows about your ability to cover your loan payments on time, every time.
For maximum fundability, aim for an average bank balance of at least $10,000. If that feels out of reach, anything over $1000 will help your loan eligibility.
4. Personal Credit Score
Particularly if you're a first-time business owner with a relatively new business, your personal credit score will play a critical role in your chances of being approved for a small business loan. If your credit score has been affected by late payments, bad debt, or even a mistake on your credit report, it could significantly damage your approval process.
Borrowers with a credit score above 700 are typically excellent loan candidates. If your credit score is between 640-700, you'll likely still have several options available, depending on your credentials in the other three categories. However, if your personal credit score is under 600, you may struggle to be approved for a loan.
Check your credit report with all three of the major credit reporting agencies (Experian, Equifax, and TransUnion) to make sure all information in your credit history is accurate and up to date. If you find any discrepancies, contact the reporting agency in writing to correct them.
Is your score still lower than you'd hoped? Settle any old outstanding debts that may be dragging down your score, and work to make payments on time, every time from here on out. Improving your credit score takes time and diligence, but after awhile, your efforts will make an impact.
Other Important Factors
Of course, these are only the essential factors that lenders will be considering when they review your application. Other factors--like the strength of your business plan, your business credit history, other outstanding debts, and more--can all have nuanced impacts on your business's likelihood of getting approved and the interest rates offered.
But if like every other entrepreneur, you're feeling short on time and overwhelmed with information, focus on improving these four areas to give your business the best possible chance of being approved for your business loan or business line of credit.