I’m sure anyone looking for a job would agree it makes sense to know what a potential employer is looking for before a job interview. And knowing what a coach is looking for when you try out for the team will likely earn you a spot if you can show him or her you have the skills they want. With that in mind, it also makes sense to know what a lender is really looking for when they ask about your credit score, time in business, and your annual revenues.
In a nutshell, here are the three things every lender wants to know—they just might not ask it this way:
1. Can you repay a small business loan?
This is why they ask about your years in business and your annual revenues. An established business with a strong cash flow and healthy revenues is more likely able to service a debt obligation. This is why it’s so tough for idea-stage and very young startups to get a small business loan. Although an angel or other equity investor may be interested in a great idea, most lenders are looking for regular payments that could start next month or even next week. No income and no ability to generate income today tells a lender you can’t repay a small business loan.
2. Will you repay a small business loan?
This is why lenders are so interested in your personal credit and business credit scores. They need to know you will make payments regularly and on time. Really, the only way to do that is to look at what you’ve done in the past. If you pay your vendors on time, are current with any loans you might already have, and your personal credit looks good, that demonstrates to a lender that you will (or at least should), make regular and timely payments. You don’t need to have perfect credit to qualify for a small business loan. There are still options for businesses with less-than-perfect credit that might get turned down at the bank—there are many non-bank lenders who don’t require the same ridged credit requirements. And, depending on other factors, could even be a better option.
3. What will you do if something goes wrong?
Although different lenders have different tolerances for risk, nobody wants to lend money to a business today that will be in default tomorrow. That’s why traditional lenders ask for collateral like real estate, equipment, and other high-value liquid assets. If you can’t make payments and default on a loan, they’ll take your collateral to recoup some of their losses. It’s also why many banks and other traditional lenders like to see that you have enough revenue to service the debt even if something goes wrong and you don’t see the positive results you anticipate the extra capital will produce. Many non-bank lenders use daily or weekly loan payment schedules to stay on top it. The smaller daily or weekly obligation is considered less burdensome to many small business owners and these lenders know today, rather than the end of the month, whether a business is in trouble, allowing them to act quickly to help the business owner keep out of default.
Whether you sit across the desk or chat with a lender over the phone, they might ask these questions in different ways, but if you can show a lender that you have the ability to pay a loan, are willing to pay a loan, and have a plan for what you’ll do in case something goes wrong, it will be a lot easier to get approved.