To obtain a commercial loan, you must apply online and then be approved. It is very simple to apply, you can check out our guide on how to get business financing to prepare for the application. The second part – approval; This is an other story. Thus, before you start submitting applications, it is helpful to know more about the requirements for small business loans and what lenders are likely to consider. Fortunately for you, we have an overview of how the approval process works! Keep reading for the four main factors that are considered by a lender.
- Personal credit history
- Your ability to repay
- Why do you want money
- The difference between your current debt and your income
If you get a positive score for these four factors, it’s easy to get a business loan. Let’s take a closer look at each factor to understand what is difficult to get a commercial loan.
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1. Personal credit history
With just about all funding for small business operations, lenders will plunge into the company’s credit history. If your business is relatively new and does not have a lot of history, your personal credit history could also be scrutinized.
Lenders take more risks when they choose to approve business loans. That’s why they want to get an idea of how you’ve handled your obligations in the past. If your credit history indicates that your business obligations are met on time and without fail, your application will be highly approved.
2. Your repayment capacity
Even if you have done a great job of repaying your debts in the past, the lender will also be interested in your current financial situation. Is there enough income every month for payments to be made? Many lenders set minimum income requirements even before considering a loan application. Make sure you respect this minimum and that there is a chance of being approved.
3. Why you want money
How do you intend to use the loan money? Is it the idea to invest in new furniture for your hotel or your bed and breakfast? You may be considering spending money to install a new heating and cooling system in the facility. When lenders can rest assured that the plan is to make improvements that can increase the volume of your business, they see your idea as a good investment.
4. The relationship between your current debt and your income
In addition to checking the amount of your earned income each month, a lender will probably need some clarification on how you plan to organize your finances, so repayment of your loan does not pose a major problem. In other words, can you make the payment while living up to your other operating expenses and debts? Even if you promised some kind of asset as collateral for a loan, the lender would prefer not to rely on foreclosure to recover all or part of the loan balance. A better solution is to know that you have a high probability of always having funds in reserve to make your payments on time.
While different lenders place more importance on certain key factors than others, expect to provide many details about the financial situation of your business. In the best case, the information you provide will convince the lender that you present a reasonable risk and approve your loan application promptly. After paying off this first loan, it will be much easier for you to get another loan from that same lender.