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Business loans are arguably the most prominent form of business finance available to this day. Is it the best option? Maybe not, but it is the most accessible for the majority of business owners. Still, there’s no guarantee that a lender will let you borrow money from them. Or, they might agree to give you a loan, but will only lend a fraction of what you requested.
This begs the question, how do lenders decide to give you money or not? When they look at your business loan application, what are the key things they’re worried about? The following short guide will explain all:
A good debt service coverage ratio (DSCR)
Your debt service coverage ratio refers to your ability to meet your debt obligations. As mentioned here, the DSCR is typically your available cash flow divided by the debt service. In the simplest terms possible, it looks at whether or not you have enough money flowing through your business to meet the demands of the debt. So, are you generating enough cash to keep up with debt repayments every month? This is such a key factor as a lender won’t want to provide money for a business that has a terrible debt service coverage ratio!
A business credit score
Believe it or not, but your business will have a credit score that lenders look at when you apply for loans. This is similar to a personal credit score, only it relates to your business’s financial position. Therefore, your personal creditworthiness shouldn’t be taken into account. Effectively, the lender wants to make sure that your company is creditworthy and can be trusted. The higher your score, the more likely it is that a lender will let you borrow money from them. Low credit scores don’t necessarily mean your application will be denied, but it could mean you are given less money as they don’t trust you enough to repay what you initially requested.
The reason for the loan
Finally, lenders like to know why your business needs a loan. What will the money be used for, and how will it help your company? This is where it helps to run financial forecasts that can show predictions for how much the loan will help your business. For instance, you could say you need it for marketing purposes, then draw up a forecast of what you can do with this new influx of cash, compared to what you already do. The lender can see from your forecasts that you predict it will help you boost your sales, increasing your profits. This links back to the first point as you suddenly have more money coming into your business, increasing your ability to repay the debt. Lenders are unlikely to hand money to businesses that don’t have a clear reason for the loan and how it will benefit them.
Ultimately, you need to put together a detailed application when seeking out business loans. This should include a thorough business plan detailing everything from your current profits/cash flow to your future forecasts. A good credit score also helps, putting you in a better position to borrow the money you need.
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