Capital is the life line of any business, and it’s required at all stages; from startups to larger companies. When a business is low on cash, it may consider securing a loan to boost up its cash flow. But, what factors affects a business loan application?
One of the reasons why some businesses fail is their inability to raise more capital to survive. However, the lending institutions are usually interested in their money more than your business success.
Getting loans from banks can be challenging and lengthy, and unsuccessful sometimes.No business in need of extra capital would want a loan application rejected.
Therefore, understanding the factors that can influence the success of your business loan application is in crucial.
Factors that can affect the success of business loan application
1. Credit History
Poor credit rating is a red flag for financial institutions in the business loan approval process. Banks usually conduct a thorough credit check before giving out a loan.
If you have poor credit rating (business and personal credit scores), it is an indication that you probably failed to repay some loans in the past.
This will impact your loan application in two ways; lender would either reject your loan application or increase interest rate and fees to cover for the risk.
2. Availability of collateral
For security of loans and reduction of lending risk, most financial institutions demand some collateral before giving out business loans.
For small business owners, the collateral could be in the form of personal assets, machinery and equipment or even stock.
Lenders take possession and sell these collaterals to cover for the amount of loan, should the borrower fail to repay.
3. Profits of your business
Profitability is vital to the existence of any business and can impact the application for a business loan. The lender wants to know the financial strength of your business to determine whether you can repay the loan and interest.
If your business records lower profits or losses, the lender could charge higher interest or even reject the application. But if your business makes higher profits, you are could be charged lower interest rate with favorable terms.
4. Type of business
The type of business you operate can very much affect your loan application. Certain types of businesses are riskier than others.
Therefore, if your business involves a lot of risk, the financial institution could approve a lesser amount of loan or charge a higher interest rate or both.
5. Business plan
Another factor that could affect your loan application is your business plan. The lender is interested in the project and direction of your company for which you need the loan for.
The business plan that reflects the right financial projections and company objectives can help the bank give you the right amount of loan.
So work on getting a professional and comprehensive business plan to support your loan application. The more lenders understand your business; the more favorably they’ll consider your application.
6. Business history
A business owner’s time-in-business can affect your loan terms. Banks give preference to businesses that have existed for more than three years with good cash flow and statement of accounts. They are mostly favored with low rate of interest.
Conversely, new business owners can expect some skepticism from lenders. This is because their businesses are not tested and proven, thus riskier to put money into it. Therefore, you’re likely to pay a higher interest rate as a new company to existing ones.
7. Debt levels of your business
Equity and debt are good for the financial health of your business. But lenders are particular about the debt levels of a business before loan approval.
So if you have a high debt to equity ratio, your business would be considered as risky to lenders because it suggests that, the business is significantly financed with more debts.
Access to capital remains one of the important aspects of business that impacts growth and survival. The factors above can affect your loan application one way or the other.
If you improve certain areas of your business, you can secure the right loan amount at favorable interest rate, with better terms of payment.