For small business owners, applying for a loan can feel like a guessing game. Why do some businesses get approved while others are denied? The truth is, lenders rely on a set of key criteria to evaluate applications. Understanding what lenders really look for can help you prepare, improve your chances of approval, and secure better terms.
In this article, we’ll break down the specific factors lenders use to evaluate small business loans—and how you can meet or exceed their expectations. For a deeper dive into lender strategies, join this Free Training to discover how to make your business irresistible to lenders.
Why Understanding Lender Criteria Matters
Knowing what lenders prioritize allows you to:
- Prepare a stronger application: Tailor your documents to address lender concerns.
- Reduce rejections: Avoid common mistakes that lead to denials.
- Secure better terms: Improve your creditworthiness to qualify for lower rates.
1. Personal and Business Credit Scores
Credit scores are among the first things lenders review. A high score signals that you’ve managed credit responsibly in the past.
What Lenders Look For:
- Personal Credit Score: Especially important for newer businesses. A score of 680+ is ideal.
- Business Credit Score: For established businesses, scores from Dun & Bradstreet, Experian, or Equifax are key.
How to Improve:
- Pay bills and debts on time.
- Keep credit utilization below 30%.
- Check and dispute errors on your credit reports.
2. Cash Flow and Revenue Stability
Cash flow demonstrates your business’s ability to repay loans. Lenders prefer businesses with consistent and growing revenue streams.
What Lenders Look For:
- Positive cash flow over 6–12 months.
- Bank statements showing steady deposits.
- A debt service coverage ratio (DSCR) above 1.25.
How to Improve:
- Automate invoicing to reduce late payments.
- Cut unnecessary expenses to boost net revenue.
- Keep detailed financial records to show trends.
3. Clear Loan Purpose
Lenders want to know exactly how you plan to use the loan. A vague or unclear purpose can be a red flag.
What Lenders Look For:
- A detailed breakdown of how the funds will be used.
- Alignment between the loan amount and your needs.
How to Present It:
- Include a loan purpose statement in your application.
- For example: “$50,000 for marketing campaigns to drive 20% sales growth over six months.”
4. Time in Business
The longer your business has been operational, the more stable it appears to lenders.
What Lenders Look For:
- At least 2 years in business for traditional loans.
- For startups, a strong business plan and personal credit may compensate.
How to Overcome Short Tenure:
- Consider microloans or online lenders that cater to newer businesses.
- Highlight industry experience if your business is young.
5. Industry Risk
Certain industries, such as restaurants or construction, are considered higher risk by lenders.
What Lenders Look For:
- Stable revenue in volatile industries.
- Evidence of effective risk management (e.g., insurance, diversified income streams).
How to Navigate This:
- Research lenders that specialize in your industry.
- Emphasize strengths like long-term contracts or repeat customers.
6. Collateral and Guarantees
Some lenders require collateral to secure the loan. This can be equipment, inventory, or even real estate.
What Lenders Look For:
- Assets that can be used as collateral.
- A willingness to provide a personal guarantee if needed.
How to Address It:
- Offer collateral or explore unsecured loans if you lack assets.
- Improve fundability to reduce the need for collateral.
7. Business Plan and Financial Projections
A detailed business plan shows lenders that you’ve thought through your growth strategy.
What Lenders Look For:
- A clear mission and market opportunity.
- Financial projections showing how the loan will impact revenue.
- Realistic growth assumptions backed by data.
How to Prepare:
- Include a 1–3 year financial forecast.
- Highlight past successes and future opportunities.
8. Fundability Factors
Lenders assess your business’s overall fundability, including professional presentation and credibility.
What Lenders Look For:
- A dedicated business address and phone number.
- A professional website and online presence.
- Positive reviews or testimonials.
How to Improve:
- Register your business with a D-U-N-S Number to build credibility.
- Use a domain-based email (e.g., info@yourbusiness.com).
Common Mistakes That Lead to Denials
Even strong businesses can get denied if they make these errors:
- Incomplete Applications: Missing documents or details can stall the process.
- High Debt Levels: Too much existing debt raises red flags.
- Applying for the Wrong Loan: Misaligned loan types or amounts can result in rejection.
How to Prepare a Winning Loan Application
To address what lenders look for, ensure your application includes:
- Personal and Business Credit Reports: Show transparency.
- Detailed Financial Records: Include tax returns, profit and loss statements, and bank statements.
- Loan Purpose Statement: Be specific and realistic.
- Business Plan: Outline how the loan will drive growth.
How the Free Training Can Help
Still wondering if your business is ready for lenders? The Free Training will teach you:
- How to improve fundability and meet lender expectations.
- Ways to secure $5,000 to $5 million in funding.
- Insider tips on how to make your business irresistible to lenders.
Conclusion
Understanding what lenders really look for gives you the power to approach the loan process with confidence. By improving your credit, cash flow, and fundability, you can increase approval odds, secure better terms, and fuel your business’s growth.
Ready to take the next step? Join the Free Training today and unlock the secrets to making lenders say “Yes!”