Without funding, a business venture will likely fold up in no time. Cash flow is to a business what oxygen is to a human being. Access to funding is one of the biggest headaches that small businesses face, however, especially in their early years of operation.
Lenders are mostly risk-averse. The higher the risk profile of a potential client, the higher the interest rates they are likely to charge. Small businesses, especially startups, are viewed as high-risk entities by most banks.
At the core of approving a loan application from a small business is an understanding that the applicant is able to repay the loan within the loan term. Before a approving a loan application from a small business, a lender is likely to factor the following metrics in order to ascertain the business’s creditworthiness.
Your reputation precedes you and everything you claim to be. In evaluating the character of a small business, a lender is looking to understand your stability. They will look at the duration you have operated from your current location, the age of your business, your industry experience and a proven track record of making timely payments to suppliers and settling bills when due.
The aim here is to establish whether you can be trusted to repay the loan going by your past track record and the health of your business. Comments left on social media platforms also provide glimpses into the nature and character of your business.
However impeccable your character may be, if you don’t have the capacity to repay the loan you are applying for, it would be very difficult to have your application approved. The ability and capacity to repay a small business loan will almost always override every other consideration. For instance, if your average month-end balance is $2,000 and you want to apply for a loan with $4,000 monthly repayments, the lender is unlikely to approve your application. It’s impossible to service that kind of facility.
The total value of your assets less your liabilities is what constitutes your capital. The difference between what you own and what you owe must be in the positive for you to claim any capital. The more capital your business has, the higher the chances that a lender will approve your loan application. If you have no capital, chances of securing a small business loan are greatly diminished.
Collateral simply refers to the assets you can present to a lender as security for the requested loan. A car, a home, or other personal assets with ascertainable value can be considered as collateral when a lender is evaluating your loan application. The higher the value of your collateral, the higher the chances that your loan application will be approved. While most online lenders do not ask for collateral, having one improves your credit score and is a strong influence in the outcome of your application.
The environment within which your business operates from is another consideration that lenders evaluate before approving your application. These conditions may have nothing to do with you or your business, but they may affect your ability to repay the loan. Factors such as the state of the local economy, competition and the specific industry might influence a lender’s perception of your application. For instance, if your small business is dealing with a commodity whose value has dramatically declined, a lender may be hesitant to approve your loan.
These are the 5Cs that every lender appraises before approving your loan application. However, the greatest weight is applied to one’s credit score, which is a credit weighting metric that evaluates and rates the creditworthiness of a business and its owner.