Does My Credit History Matter

Your credit score plays a very important role when it comes to securing a small business loan. It is not as important in whether or not you get approved because we assist our clients in receiving business loans with FICO scores as low as 500. It is however a big part of determining the rates and terms you will receive. The lower your credit score the higher the risk involved with processing your loan. If rates and terms are critical to making the business funding work for your project at hand then there are steps you should take before applying. Have a look at our guide to repairing credit as well as our guide to understanding the different types of credit history.

What are Lenders Looking for in an Application

Debt Service Coverage Ratio (DSCR) What lenders look at to assist you in determining the payments your business can handle. Simply put your DSCR is your cash inflow divided by debt expense, or basically your overall ability to service the debt. As an example, if your cash inflow or net operating income (NOI) is $140,000 per year and your total debt expense is $100,000 each year, then your DSCR would be 1.40. Although lenders do consider external revenue sources, existing assets, business cycles and seasonality, and other factors, cash flow is a strong indicator of what type of loan payments a business has the capacity to maintain. Below find a snapshot of the actual DSCR formula.

Bank Payment History Lenders look closely at your business banking history by reviewing your business bank statements. If you have several days of negative bank balances in a short period of time it will make it more difficult for your business to get funded. Most lenders do not want to see more than 3 to 5 negative days in any given month. Lenders also look at your deposit volume, meaning how many deposits you make a month. Another important factor considered is revenue. Lenders want to know if your revenue is increasing or declining, as well as when was the last time you generated revenue.

Outstanding Loans A big indicator of whether or not you are eligible for funding is whether or not you have any outstanding small business loans. There are many lenders who will provide loans on top of other loans, but DSCR will play a big role in that determination.

Business Industry Many traditional lenders want to know what industry your business is in because industries that have good cash flow are ideal. However, industries that do not have good cash flow require stringent underwriting and are more difficult to fund.

Rent/Lease Agreements Lenders want to know whether or not your business rent or leases are paid on time as well as how much time is left on your lease.

What are Common Documents Required for Small Business Loans

The financial industry is no longer limited to one or two traditional loan products, there are actually a wide variety of small business loans available and being prepared when you apply guarantees the best results when funding your business. Lenders can require very little or extensive paperwork depending on the small business loan selected and the financial health of the company. As an example, bad credit business loans require just a few documents whereas prime business loans may require a long list of documents because of the better rates and terms offered. Check out our guide on the most common types of documents required when applying for business loans for more detailed information on the topic.

• Bank Statements. A typical application requires the submission of 3 to 4 months of bank statements. Larger loans may require up to 12 months.
• Business Licenses. Certain business licenses or certifications may be required depending on the state.
• Proof of Business Ownership. Typical documents like articles of incorporation or related documents depending on your business structure may be required.
• Lease Agreement for Business Property. If you pay rent or utilize a location for your business you may be required to submit a copy of your lease.
• General Identification. Your personal identification is required. Be prepared to submit a copy of your driver’s license or the equivalent.

Additional Documents Required for Small Business Loans Above $100,000

• Personal Tax Returns. The application process for larger loans will also require that you verify your personal income with personal tax returns for up to 2 years.
• Business Tax Returns. The application process for larger loans will require up to 2 years of the most recent tax returns for your business. If you do not have business tax returns because of the way your business is structured then other forms of supporting documents may be required.
• Balance Sheet. The application process for larger loans may require a look at your most recent balance sheet to determine the financial health of your business.
• Profit and Loss Statement. To complete your application for larger loans you may have to provide Profit and Loss statements (P&L) for the two most recent years. This insight will help determine what type of payment structure is viable for your business.
• Business Debt Schedule. For larger loans you may be required to submit a business debt schedule. This is more insight for determining what type of payments can work for your business.