According to Small Business Administration (SBA) statistics, approximately 20% of new businesses fail within the first year. Within five years, around half of all companies fail. Entrepreneurs claim that a lack of funding is one of the leading causes of failure.
If you’re ready to grow your company, you’ll need working cash to pay for new staff, office space, materials, equipment, marketing, and other expenses. Unfortunately, not every prospective entrepreneur has the necessary funds to get their firm off the ground. This is when commercial loans come in handy.
Like most good things, business loans aren’t easy to get. They carry a higher risk for the lender than a personal loan, resulting in stricter eligibility conditions. Many entrepreneurs want a business loan but aren’t sure if they fit the requirements. Below we will discuss what the current requirements are for U.S startups.
Good Credit Score
High-interest rates can seem like a blow in the gut for business owners considering a loan. However, the higher your credit score, the more likely you will get approved for a loan with a low-interest rate. Keep in mind that lenders, for example, a net30 account, consider personal and company credit scores and histories when making lending decisions. Personal credit is much more critical for small-enterprise owners because they don’t have business credit. To get a business loan, you’ll almost always need a credit score of at least 600.
Cash Flow
Your company’s cash flow can make or break a business. A consistent and healthy cash flow demonstrates to lenders that you can make loan payments. It’s essentially a representation of the health of your company. Lenders will most likely look at expenses in addition to income to determine how lucrative your firm is. If you’re starting a business or don’t have enough cash flow, we recommend looking into our five favorite business loans for startups.
Business Age
Approximately 20% of businesses fail in their first year. It’s no surprise that most banks and internet lenders demand borrowers to be at least 18 years old. In most circumstances, the minimum company age requirement might range from six months to two years. However, keep in mind that lenders consider the time the business’s bank accounts have been open, not the length of time the company has been registered with the government.
Current Debt Amount
Lenders use the debt-to-income ratio to calculate the percentage of your monthly debt payments compared to your monthly gross income. Most lenders require a debt-to-income ratio of 50% or less. As you might expect, small-business lenders are hesitant to lend to customers who have previously taken out other loans. Create fail-proof payment plans and stay away from excessive interest rates to prevent falling into debt. Lenders will want to see a balance sheet and a debt-to-income ratio. This simple document describes your company’s financial condition, including assets, liabilities, and equity. Your total assets should, in theory, equal the sum of your liabilities and equity accounts.
Collateral Goods
To approve a loan, lenders may require collateral, such as invoices, equipment, real estate, and businesses. Business automobile loans, believe it or not, might also require collateral. The term “collateral” refers to the business owner’s tangible assets. Certain lenders may demand borrowers to pledge both business and personal assets to obtain a business loan. We recognize that this isn’t the best position for a company. However, there is some good news: some company loans do not necessitate collateral. In addition, certain company loans have flexible repayment terms and are simple to apply for.
If you have to go into debt, do so wisely. Use debt to purchase income-generating assets whenever possible. Having several sources of income isn’t simply a survival strategy; it’s also a wealth-building approach. For example, your loan could and should pay for itself within a reasonable time frame if you buy an office complex or an existing business with a solid cash flow. Intelligent asset management can also boost the asset’s income.
Final Thoughts
There is no such thing as a one-size-fits-all solution when applying for a business loan. While you may believe that to get the best small-business loan, you need a perfect credit score and a high annual income, most lenders consider various factors. You can also quickly improve your chances of getting a business loan by planning and making wise financial decisions.
