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When you want to grow your small business empire and need commercial financing to do it, you want to put your best foot forward. While many factors come into play, we’ve identified the 4 most important things that will affect your chances of securing commercial financing.
Knowledge is power, and leveraging these 4 areas will get you closer to your goal.
Spoiler alert: it’s mostly about money—lenders want to know how much you have on hand, how much you bring in, and what you do with it on a regular basis.
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From a lender’s perspective, your credit score equals your trustworthiness as a borrower. If you have a score above 700, you’ll have access to some great loan options. But if your score falls below 600, your options for loans will be more limited, and you might get stuck with a higher interest rate.
Lenders want to see how you handle your personal finances because they perceive it as a strong indication of how you’ll manage finances for your business. Therefore, your personal credit score is a fundamental piece that affects your commercial financing chances, especially if you are in the early days of getting your business going.
Maybe you think it’s odd to need cash in the bank when you’re trying to get cash from the bank. After all, if you have cash, why would you need to apply for more? Even so, lenders want to know what cash reserves you can immediately access if necessary.
Making money is part of having a successful business. But lenders are not as much interested in what you make—they want to know what you do with the money after you make it. Lenders look to see if you can maintain a cash cushion or if you re-allocate it as soon as it comes in.
Regardless of your sales figures—yes, even if they are high—lenders want to see that you have cash reserves. This increases their confidence that you are financially responsible and can repay your loan in full and on time.
Ideally, lenders want to see an average balance of 3 months’ worth of operating expenses, including your loan payments. You’ll need to show your bank statements for analysis, even if your business is just starting up and you don’t have a long history to share.
Your best bet is to share the bank statements you do have. If you can add supplemental financials, this will increase your chances of getting the commercial loan that’s best for you.
You know that unplanned expenses are the reality of operating a small business, and so do lenders. For that reason, they may limit your approved loan amount to 8-15% of your company’s annual revenue.
Verifying your annual revenue requires two things. First on the list: a year-to-date profit and loss statement updated within the last 60 days. This should be supplemented with a statement from the previous two years.
Lenders will look at your P&L statement to see the strength of your cash flow—specifically that your revenue is enough to cover your company’s current expenses, plus payments of principal plus interest on any commercial financing you take out.
To verify your revenue, lenders could ask to see your business tax returns. Do you have 2 to 3 years of tax returns to share? The forms could be just the evidence they need and might even qualify you for more financing options.
We know from Small Business Administration data that about a third of all businesses fail within the first 2 years and a full half of all small businesses don’t make it past the 5-year mark. With such stark survival rates, it’s no wonder that from a lender’s perspective, offering commercial financing to established business is a lower risk proposition than funding a startup within its first 2 years.
As a result, the amount of time that you’ve been in business can have a pretty dramatic impact on your ability to obtain financing. If your business has been open for less than a year, you might be better off working with what you have available until your business is a bit more established and can obtain a business loan at a lower interest rate.
Securing commercial financing is not always easy, but if you know what you’re getting into and the things that can make or break your chances, you have a good start.