Qualifying for a small business loan is a challenge for many business owners. Most entrepreneurs don’t start a business because they’re experts at small business financing—and they shouldn’t need to be.
However, they do need to become experts at financing their businesses. I’m convinced it starts with understanding some of the questions a lender will likely ask and why they ask them.
Question #1: Can you repay a loan?
They probably won’t ask it this way, but every lender wants to know if you can repay a loan before they offer one to your business. This is the question they’re really asking when they want to know how long you’ve been in business, what your annual revenues are, or ask to see the last three months of your business bank statements. If you can’t show a lender that you have some experience, have revenue, and have cash in your bank account, you’re basically raising questions as to whether you can make the loan payments.
Every lender wants to know that you’ll be able to make the periodic payments—starting with the first payment. I once spoke with an entrepreneur who was in the idea stage, had no business credit, had a poor personal credit score, no cash flow, and no business revenue. He couldn’t understand why he couldn’t find a lender willing to offer him a small business loan.
I don’t know how much time he’d spent looking for a loan before he met me, but he didn’t like it when I explained why he was having such a hard time obtaining a loan. He couldn’t demonstrate that he was able to repay a loan.
Be prepared to talk about your business’s profitability, revenue, and how you manage your cash flow. If you’re applying at a local bank, you’ll need your profit and loss statements. If you’re applying with an online lender, you’ll likely need the last three months of business bank statements. While both lenders might be asking for different things, they’re both trying to find the same answer: Can you repay a loan?
Question #2: Will you repay a loan?
“Will you repay a loan?” might sound like the first question, but it’s not. This is why a lender looks at your business credit profile; they’ll likely look at your personal credit score too. They’re trying to gauge what you might do in the future based upon your credit history—or rather, what you’ve done in the past. In many cases, a poor credit profile doesn’t paint a very optimistic picture of the future.
Nevertheless, there are times when a borrower could have a blemish or two on his or her credit profile and still be a great borrower. With that said, some lenders have thresholds below which they typically just won’t go.
For example, if you have a personal credit score below 680 (650 for an SBA loan), it’s very unlikely you’ll find any success at the bank. If that describes you, you’ll need to spend time rebuilding your credit before you apply.