Taking the Mystery Out of Small Business Lending Practices
You have started the process of opening your business, but the most important puzzle piece may still be missing — funding. Where do you start? What will you need for the lending process? Not sure? Jared Hecht, CEO of Fundera, has compiled a list of important factors to remember when searching for a business loan.
Launching or growing a small business involves a lot of moving parts that all require tracking. Along with keeping your customers happy, you're busy managing expenses, dealing with logistical requirements, coordinating employees, and much more.
If you're applying for a small business loan to grow your business, your list of action items is even longer. You need to finalize your business plan, get all your financials in order, shop for the perfect loan product, complete your application — it may seem like the list grows every minute.
Let's pare down your funding to-do list by honing in on the essential factors that small business lenders care about most when reviewing your loan application.
Need a Small Business Loan?
1. Annual Revenue
You're in business to make money. Or at least, you should be. As such, your annual revenue is a major indicator to lenders of your eligibility for a business loan. Lenders like to see that you have enough cash coming into your business to cover your loan payments, along with the rest of your company's operating payments.
Typically, lenders want to limit your total loan amount to less than 15% of your business's total revenue, ensuring that you'll be able to make your loan payments in case emergency expenses come up.
2. Time in Business
Of course, in order to even have an annual revenue, you need to have been in business for a little while. This is one of many reasons that, like a fine wine, your business's loan options get better with age. Small business startup loans are notoriously hard to secure. Lenders know that 50% of small businesses fail within the first five years. The younger your business is, the less likely you are to make it for the long haul.
In general, businesses that have been operational for more than two years are typically the most fundable. If you've made it through your first year of business, you likely still have options. But if you've been in business for less than a year, you may have a harder time being approved for a small business loan.
Unfortunately, unless you happen to have a DeLorean handy, this one is pretty much out of your control. If you're struggling to secure funding for your brand new business, the best you can do is wait and apply again when your business has a little more time — and revenue history — under its belt.
3. Average Bank Balance
Even with strong annual revenue numbers and enough time doing business to work out the kinks in your business model, it's inevitable that unexpected expenses come up. Your roof leaks, or you get a bad batch of inventory, or a client doesn't pay – any one of these factors can tank a business unprepared for the unexpected. That's why lenders like to see that you have enough padding in your bank account to bounce back from a rainy day.
Your average bank balance tells your lender three things: the health of your cash flow, the profitability of your business, and the financial cushion you have on hand. Even if your sales numbers are fantastic, a low or even negative bank balance will raise eyebrows about your ability to cover your loan payments on time, every time.
For maximum fundability, aim for an average bank balance of at least $10,000. If that feels out of reach, anything over $1,000 will help your loan eligibility.
For more lending factors and tips, read the full article on The Huffington Post.