In theory, yes. If you meet the lenders minimum criteria for commercial finance, you’ll be well on your way to obtaining that loan, but what are the lenders minimum requirements?
If you’re in search for business finance you may have come across many companies that allow you to submit an application, but few that disclose the exact requirements for the funding. But why?
We understand the frustration. Why can’t lenders just disclose their exact criteria to make it easy for everyone?
The short answer is it’s just not that easy. Each lender has their own minimum criteria, but will also consider a multitude of other factors when assessing an application, and no two businesses are the same. This is why lenders often display their basic criteria for a finance application, but still need to conduct further checks to decide the outcome.
Despite this, we’ve rounded up some of the key factors lenders will consider when underwriting a finance application.
Know your financial history (Credit score)
The financial history of a business gives a good indication of the level of risk a business poses to a lender. If a business has a strong history of being responsible with credit, such as consistent timely payments, lenders will be more likely to look favourably upon the business.
Common practice is for lenders to examine this by checking the business’s credit score. This will show any history of late/missed payments, amongst other factors.
Understand current business performance
An affordability assessment is a key part to any financial underwriting process. Lenders must ensure the amount of finance in question is affordable before approving. If the performance of a business at the time of application is weak, lenders may not consider finance suitable.
It’s best to review your business’s past and current performance, and demonstrate to the lender how the business will afford to make the repayments. If the loan in question will enable to business to increase revenue, such as the purchase of additional stock, make this clear in the application.
If business performance is slower than usual, this doesn’t necessarily mean you can’t obtain credit, as some lenders will cater for factors such as seasonality. If this is the case, ensure your application explains this in detail.
Explain the purpose
Business finance comes in all shapes and sizes, and so do the reasons for needing it. The purpose of the finance will be a considering factor for the lenders, so it is essential to explain both the purpose, and the potential changes that will take place if the application is successful.
If a business applies for finance with the intention of purchasing an asset that will make little or no contribution to the business performance, it’s won’t be considered favourably.
For example, if the loan purpose is to upgrade to the latest equipment, but the equipment upgrade won’t impact the business’s performance, it may not be considered as a good reason for the finance. On the other hand, if a business applies for a loan with the intent of increasing output, such as purchasing more stock, or a moving to a larger premises, it’s likely to be looked at more favourably in the eyes of the lender.
Be aware of key player credit history
As discussed in our Personal credit vs Business Credit article, the credit history of key players within the business is likely to have an impact on the ability to obtain business finance. No matter what the legal entity, lenders may need to credit check those with key roles in the business, such as shareholders and/or directors.
Lenders often consider this necessary as in their eyes the members responsible for running the business must also demonstrate responsibility with credit. Therefore, if there is anything likely to cause red flags on any key members credit history, ensure this is explained fully in the finance application.
Understand trends
Most businesses will have good and bad periods of performance, which to a degree can be considered normal. Lenders will often examine these trends when deciding whether or not finance is suitable, so it’s best to understand and explain your business’s trends when submitting an application.
Having negative trends doesn’t necessarily mean you won’t be able to obtain finance, as long as there is a valid explanation. If this is the case, it’s good practice to include a plan that explains how the business will overcome the negative period, and if relevant, how the finance will aid in doing so.
In summary , lenders always look to minimise their risk, so demonstrating responsibility is key to a successful application. If there are any factors that cause concern to the lender its always best to include a full explanation about the reasons for them, and why they will not be repeated.
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