Our goal at Benchmark Commercial Lending is to provide access to commercial loans and leasing products for small businesses.
Before you dive into the process of finding your perfect business loan and applying for it, you need to first check in on the key criteria that lenders consider when choosing whether or not to lend to you.
In order to assess the risk they’re taking on by lending to you, lenders will look at certain metrics that indicate how likely it is that you and your business will be able to pay back the loan. Based on this assessed risk, lenders will choose whether or not to lend to you and your business. More affordable, longer term, and larger loans are typically less accessible to business whose three main credentials aren’t stellar.
After that, if lenders do choose to extend your business a loan, then these criteria will also determine how big the loan is and what terms this loan will come with.
Where do each of these numbers round in for your business?
If they’re less than desirable and you need a business loan now, your options might be limited to a few products.
As such, if your credentials aren’t stellar, but you don’t need a business loan right this moment, it’s best to spend time improving your credentials before taking on an expensive, short term loan.
Here are the three most important numbers that lenders look at when you apply for business funding.
Lenders will look to your business’s annual revenue as a signal of how much money your business is taking in. Ultimately, this will let the lender know how likely it is that your business will be able to make room in its budget for repaying the money that they lend you.
We get it—this main critera seems counterintuitive because it’s your personal credit history, but it’s a crucial part of the overall picture of your business’s financial health.
Lenders will look to you, the business owner, as an indication of how well the business’s finances will be handled. Lenders assume that if you handle your own finance well, then you’ll handle your business’s finances well, and vice versa.
And this “vice versa” scenario proves to be an obstacle for many business owners in their search for business funding.
In some cases, if your business is well established, lenders might waive the personal credit check and replace it with a business credit check, but this is very rare and often relies on a long history with a lender.
Finally, the third main credential that lenders will look at during the application process is your business’s age. This number will essentially indicate your business’s longevity to the lender.
On the one hand, finding funding for a new business is difficult, because lenders have no proof that your business will last. On the other hand, securing funding for a business that’s been running for year is easier, because the lenders can see that this business is well-established and steady.
All in all, your business’s age is just another way for lenders to estimate how likely it is that you’ll be able to pay back the money they lend you.
Now that you’ve looked over your own credentials, it’s time to gather proof of these credentials. If you need a business loan, you’ll need to gather these basic documents for the application process. And if you need a business loan ASAP, then you need to gather these documents correspondingly quickly.
Though it may seem like an arbitrary hassle, these documents are the only way for lenders to get a good picture (and the official proof of this picture) of your business’s financial health.
In order to give lenders all the data they need on your business, you’ll need to gather these six, basic documents. Depending on what loan product you apply for, you might need to gather more or less documentation than the six, but if you know you need a business loan, it’s a good idea to start with these basics.
Your business’s banks statements will give lenders a good idea of how much cash your business is earning. Additionally, these bank statements will show the lender how you manage the business’s finances.
Different lenders will ask for different periods of bank statements, but you can bet on having to provide at least a few months’ worth of your business’s bank statements.
Just like your business’s bank statements, a balance sheet provides another snapshot of your business’s finances. A balance sheet will indicate to a lender whether or not your business will have enough money to cover its operating costs and pay back its loan.
If you don’t yet have a balance sheet for your business’s finance, check out our free template to make on right away.
The lender will also want to see your business’s net income, which is where the profit and loss statement will come in.
Lenders often ask to see profit and loss statements for 2 years prior, and even ask for one that’s been updated within the past 60 days.
Be sure to keep on top of profit and loss statements in order to have the documentation you need to apply for a loan.
Similar to considering your personal credit score, having to provide your personal tax return along with your business tax return seems a bit counterintuitive.
However, this personal tax return gives lender a fuller picture of how you handle money—essentially verifying your income. Because you’re the business’s owner, how responsible you are with finances is crucial information for lenders.
Additionally, lenders will ask for your business’s tax return so they’ll have official proof of your business’s annual revenue.
As your personal credit history is crucial information for lenders, they’ll need to look to your personal credit score to get an idea of how financially responsible you’ve been in the past.
If your personal credit score round in at 700 or above, you should be able to access most business loan products out there.
However, if you’re working with a credit score of 600 or below, you might have trouble securing affordable business financing.
Lastly, you’ll need to indicate to your lender exactly why you’re searching for business funding.
This will also be a crucial question to ask yourself before applying—what would this hypothetical loan go towards within your business’s budget?
The answer will lead you to a another necessary step you need to take if you need a business loan—finding out the right loan type for your business.