What do lenders look for before approving a business loan?

0
321
business loan

No matter if you’re looking to expand your services or are struggling after the past couple of years, many businesses across the UK look to source additional funding for one reason or another. With companies now steering away from traditional lending and searching for alternative lenders, what are some of the key expectations of lenders and criteria you’ll need to consider before submitting your application?

Credit score

You may only think that credit scores apply for personal loans, however, they’re still applicable for businesses too. For any kind of lender, good credit history is always high on the priority list. If you or your business don’t have a good score, the chances of getting approved for a business loan can be much more challenging.

Understandably, lenders are concerned about repayments and want to make sure you can meet these regularly. A good credit score shows strong money management skills, which is never a bad thing!

Collateral

Simply put, collateral is something you agree to give to the lender if you’re not able to keep up with your repayments. Often if you’re opting for a secured loan, these will involve collateral. When deciding on which option is best for you, it’s important to remember that secured loans usually have a lower interest rate than unsecured loans. This is because, thanks to your collateral, the lender has a way to recoup its money if you fail to pay.

Debt to income ratio

This ratio looks at the monthly debt you owe as a percentage of your monthly income. Ideally, to be approved you’ll have a low debt-to-income ratio. If yours is too high, it’s likely you won’t get approved for a business loan.

Lenders are likely to see you as more of a risk if your debt-to-ratio income is too high, so try and get yours down as low as possible if you can before you apply.

Business plan

One of the key steps you’ll need to take before applying for a business loan is to develop and write your business plan. This will show a lender a wealth of information such as your experience, an overview of your business’ services or products, your marketing strategy and associated costs and most importantly, a financial and cash flow forecast. Lenders will want to see all of this information and more, so make sure it’s well written and thorough. The more you include the better!

Capacity

Lenders will always look at whether or not you have the capacity to pay back your loan. They’ll check your financial statements to make sure you have enough cash in the bank to make payments, should you get approved.

If you’re thinking “how can I prove my capacity?”, there are two main ways you can do this. First, you can reduce the debt you owe do you have a lower debt-to-income ratio, or you can try to increase your cash flow by adding additional income streams. Whether this is offering an additional service or more products – this is completely up to you.

LEAVE A REPLY

Please enter your comment!
Please enter your name here