5 Factors That May Affect Your Application For A Business Line Of Credit
If you own a business, you know you sometimes need access to funds to help your business grow. Even the most successful companies sometimes face late payments, unplanned emergencies, expenses, and other challenges. In such instances, access to available credit would mean the difference between closing shop or surviving the challenges and coming out on top.
When it comes to a business line of credit, various factors may affect your approval, whether you are applying to get a loan for your business without docs or a secured loan. They include:
1. Personal credit score
When applying for a business line of credit, they will consider your personal credit score. This is because you will personally be expected to repay the loan if your business cant. Additionally, lenders want to test and see how you’ve been operating with money and if you repay other loans you’ve had in the past.
To get approved, they normally need you to have scores of 680 or even higher.
2. Business credit scores
In addition to checking your personal credit scores, lenders will also check your business credit. If you are a startup business with no credit history, the lenders will rely on your personal credit scores.
However, if you have a business credit history, whether good or bad, the lenders will use it to determine whether to approve you for a business line of credit.
3. How long you’ve been in business
The risk of running a small business is high. Statistics state that a third of small businesses don’t survive two years, and only half make it to their fifth anniversary. With repayment plans that may stay longer than five years, it’s no shock that lenders would be cautious about giving your business a line of credit.
Time in business will vary according to different lenders, but most would at least want your business to have been running for two years plus. Some may let you apply if you have been in business for a year or less, but it may cost you more in rates.
4. Business financials
Apart from checking how long you’ve been in business and your personal and business credit scores, lenders will also ask to review your financial statements. They evaluate debt to equity ratio, current ratio, and fixed charge coverage ratio.
The better your ratio, the more likely you will be approved with favorable terms and rates.
Some industries tend to be riskier than others, such as real estate, restaurants, and retail businesses. The risk of the industry will determine whether a lender will approve your business line of credit.
However, sometimes your experience in the industry may also be considered. For example, suppose you have previously successfully run a similar business and are now starting a new one in the same niche. In that case, lenders may consider that more than a person who is new to the industry.
Being new in the industry doesn’t automatically say your application will be denied because they also consider the other factors we have mentioned above.