What does it take to get the best business financing? Obtaining the correct business financing for your business is fundamentally limited to two important factors. Number 1 the lender that you apply with and number 2 your business’s creditworthiness.
It all starts with applying to the right source. For example, let’s say that your business is highly creditworthy, but if you apply to a broker that has limited experience and a lack of resources, you could be wasting your time (and credit score). The broker may offer you a ridiculously high rate and just hope that you take it. Other companies may promise applicants with the ‘best rates’, and a multitude of ‘different programs’, but this should be a red flag. If these lenders have the best rates then wouldn’t they post these on their website? Most brokers offer merchant cash advances (MCA). These advances are high interest and extremely short term. Buyer beware: if you see or hear mention of advance products don’t apply! Line of Credit Depot does not offer merchant cash advances. We only offer lines of credit to our customers. If you aren’t approved with us we will clearly advise you why and what to do in order to get approved.
That brings us to the second fundamental fund regarding obtaining capital for your business. Your business’ creditworthiness is extremely important. Lending, especially to businesses, is extremely risky. Although each lender has different underwriting criteria, here are the general guidelines that your business must reach in order to receive a bank revolving line of credit.
Personal Credit Score: Even though a business line of credit is afforded to a business, the owner’s credit score does play a part in the underwriting process. Why? Because payment decisions and directions are enacted by the owner of the business. If an applicant holds lower than a 680 FICO 8, they may be declined for a credit line. We see it all the time; sometimes the business is very creditworthy, but the applicant’s personal credit is fair to good, and not over 680. In this case we will analyze the personal credit score to see how we can guide the applicant in quickly increasing their score. Usually there are quick fixes that one can do to increase a personal credit score.
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Time in Business: If you look at this underwriting guideline from a bankers perspective, it makes a lot of sense. Small businesses in America are quite a gamble. According to the Small Business Administration (SBA), about twenty percent of business startups fail in the first year. About half succumb to business failure within fire years. By year 10, only about 33% survive. This statistic is exactly the reason why lines of credit are not available to ‘start-ups’. So much can go wrong in a new business, so banks can’t take risks on these unknowns. If a business has been in business for 6 months, the odds of them going out of business by year 3 are very high. Generally speaking, any business older than 2 years old can qualify for a bank revolving line of credit. The older the business, the greater the chance of approval.
Industry: Generally speaking, most non-vice industries can receive lines of credit. This list is a bit more strict than compared to merchant cash advances, but still quite broad. Keep in mind that in the post Covid-19 economy, certain industries such as hospitality may see lower approval amounts.
Profitability: This is probably one of the most important factors in seeing if your business will be approved for a line of credit. Unlike merchant cash advances, lenders that offer lines of credit want to see the business as profitable. This is because the lender wants to make sure that the business can afford to pay back the financing. Banks first look to see what the business has declared on their business tax return. This shows whether the business showed profits in the prior year, or encountered losses. Now, even if there is a negative number (not profitable), this doesn’t mean that the business won't get approved for a line. There are certain ‘add backs’ that can increase the bottom line number, increasing the chances for a line of credit approval. Interest costs, depreciation and owner compensation can be deducted from the net profit.
If you have questions about whether or not your business will be approved for a line of credit, please apply here to be assigned a line of credit specialist. Most times we can give you a clear idea if a line of credit is available for your business.
