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No matter what type of business loan you’re seeking—whether it’s an SBA-guaranteed loan from a bank, a loan from a credit union or an alternative lender—there are 4 questions that every lender will ask. Study up so you’re never caught off-guard.
The longer you’ve been in business, the better. About half of U.S. small businesses shut down within their first 5 years. If you’ve beaten those odds, lenders will feel confident you’re doing something right and that your business will be operating long enough to pay back your loan.
What can you do if you haven’t been in business that long?
If you need money right away, consider alternative financing sources or securing a loan with your personal credit. If you can manage without financing for now, the best you can do is hang in there. Once you get past 2 years in business, lenders will be more willing to take a chance on you. As you strive for that 5-year mark, avoid getting stuck with too much debt and work to maintain high personal and business credit scores.
In other words, the lender wants to know your revenues and your profits—which are two different things. Gross revenue, also called total revenue, is the sum of all income you receive from customers before you pay your expenses—like overhead payments, purchasing equipment or other assets, and paying back debt.
Your net profit, also called net income and net earnings, is that gross revenue minus your expenses.
Net profit matters more to lenders than revenue, because it shows how much of your income you actually keep. It’s entirely possible to have impressive revenues and still not make a profit because your expenses are too high. (And even if your business is profitable, poor cash flow can cause problems getting a loan—see the next question.)
Learn more about profits, revenue, and other business accounting basics.
Lenders will look at your financial statements and average bank balance to understand how well you manage cash flow. Cash flow is different from profitability: as mentioned above, even a profitable company can struggle with cash flow problems.
Your cash flow statements show the bank how much money you have available at any given time.
Why does this matter? Well, suppose your business makes $120,00 in profit annually, and you take out a loan with a monthly payment of $2,000. At first glance, it looks like repaying the loan should be no problem. But what if you’re a retailer, and $90,000 worth of your annual profit doesn’t come in until the fourth quarter of the year? Will you have enough cash on hand during the first 9 months of the year to make that monthly payment?
Your cash flow statement and business bank statements should prove to potential lenders that, at any given moment, you’ll have enough cash on hand to cover your loan payments—with extra to spare.
Download a free cash flow template to help manage your cash flow.
When financing a business, lenders will want to see personal and business credit scores. Yes, even though you’re applying for a business loan, your personal credit score still matters.
For one thing, if you don’t have a 5-year track record in business, your personal credit score might be all that your lender has to go on. Even if you’ve been in business for awhile and have a respectable business credit score, many lenders still look at your personal credit score as a reflection of your overall “creditworthiness” or reliability”
What’s a good credit score, in that case?
That doesn’t mean you need an amazing credit score to get business financing, though. In fact, the average small business owner who finds a loan through Fundera has acredit score of 620 to 660, firmly in the “fair” range. But the higher your credit score, the more types of loans you’ll qualify for and the lower interest rates they’ll come with.
Learn more about what business and personal credit scores mean and find out how credit scores get calculated at every major credit bureau.