How To Know If Your Business Is Eligible For A Commercial Loan

If your business, like many of the enterprises worldwide, has been deeply affected by the pandemic, you may rely on a commercial loan to finance your operations. Crisis or not, business loans are believed to be critical support for businesses, whether small or large. 

Loans, which are used for funding specific business operations and expansion, are known to be crucial in starting, running, and expanding any kind of venture. In some cases, it may not be even possible for some companies to run seamlessly without the help of commercial loans. From property or asset acquisition to research and development, a business loan could fund various activities that a company may not afford to pay. 

When looking for commercial loans, small businesses often go to banks and lending institutions. However, they could get intimidated or be too afraid to ask questions about the application process, the requirements, and how to increase the chances of getting approved. If you think you’re ready to take the plunge, take heed of the following points to know whether your business is eligible for commercial financing. 

Eligibility Requirements Vary

Lenders, whether banks or government-run lending agencies have various requirements, rates, terms, conditions, and fees. However, with the Covid-19 pandemic, some institutions may have become less stringent in terms of accepting and screening commercial loans.

Financial institutions have programs that suit a specific borrower from a particular sector, and these programs also dictate changes in criteria. For instance, while most agencies prefer to lend to established businesses, some may offer special loans to fresh businesses. Hence, another set of requirements in lieu of business financial reports may be required. 

What Makes Your Business Eligible For A Commercial Loan?

To know if you qualify for a commercial loan, it’s best to contact the lending institution. However, you could perform a self-assessment by considering the following common lending qualifications: 

• Impressive credit score: Banks and lenders generally take into account the borrower’s business and personal credit scores. Because building a credit history takes time, startups may not have enough credit score to support their application. In this case, lenders would normally ask for a guarantor. Ideally, a borrower’s credit score should be more than 600 to qualify for a loan.

You may read this informative post about the importance of having a favorable credit score before applying for a loan.

• Solid business plan: Financial institutions would normally require borrowers to have a sound business plan, partly to assure them that you’re capable of paying your debt. A good plan entails a clear explanation of why you need the money and how you’re going to spend it to provide stability and increase revenue streams.   
• Stable income streams: Lenders would want to make sure they’re going to be repaid. If you’re availing of an unsecured loan for your business, you might need to prove that your business income could cover your business operations and debts, including the projected monthly fees for your commercial loan.

• Sufficient business experience: Some lenders would require the business to have been in operation for a specified period. The most common eligibility period for commercial loans is a two-year operational requirement. Some lenders may be less strict and would consider enterprises that have been operating positively from as early as one year before the application period.    

• Ample net worth: Banks commonly look social resilience of the business, as well as the business owner or guarantor. If there are not enough business assets to offer, the principal borrower may have to show they have liquid assets.    

Commercial loan lenders may ask borrowers to put up collateral for a secured loan. Most financial institutions may provide secured business loans of up to 75% loan-to-value (of the collateral). But these happen only in exceptional cases. A likely scenario would be entering into a purchase money deal, where you’re buying the property and using it as collateral for your business financing.  

• Current amount of debt: Apart from your net worth, lenders would likely look at your business and monthly debt-to-income ratio. This would give them a better perspective on your capacity to pay. Hence, even if you have a favorable credit score but have other active debts, lenders may not view your application positively.   

Some lenders would require borrowers to have a debt-to-income ratio of 50%. The lower the rate is, the better. 

Also read: Top 3 Short Term Loans for Bad Credit

Final Thoughts

There are various commercial financing products being offered in the market these days, and it can be confusing which one is best for your business. Before applying for a commercial loan, it’s best to perform due diligence and ask around. Doing this may further delay the already time-consuming application process, but it’s all well worth it.