Whether it’s to start a new business, invest in essential equipment, or refinance existing business debt, chances are you’ve thought about taking out a business loan. You might even be looking into it right now. But with so many myths and misconceptions out there about what it actually takes to qualify for a business loan, confusion is common. In the spirit of easing your mind, calming your nerves, and equipping you with the information you need to succeed—today we’re diving into what basic criteria your business needs to meet in order to secure funding.
Qualifying for a business loan: what you think you need
You probably have some idea of the various factors that are involved in applying for, and getting, a business loan—things like a good credit score, a certain length of time in business, strong revenue, and other criteria. In fact, many businesses assume that they won’t be eligible for a loan based solely on their assumptions of how strict the criteria are. That can lead to them giving up before they even start the application process, which is a missed opportunity for a business with the potential to grow.
Yes, it’s true that some businesses aren’t able to meet qualifying criteria for banks and other financial institutions. But at Pursuit, we work to understand your business and its unique position. We consider a variety of factors that make up your business’s eligibility for funding and spend time getting to know the people, passion, and mission behind the numbers. So even if you don’t meet the criteria elsewhere, you may well qualify for a loan with Pursuit.
With that in mind, here are the main criteria for qualifying for a business loan:
The 6 Cs of business lending
Capital: It may seem counterintuitive that you need capital to be able to borrow money, but it doesn’t just mean cash in the bank. Lenders are generally looking for reassurance that a business has the ability to repay a loan, whether that’s through net worth if your business is already established, or, in the case of start-ups, that the applicant themselves has enough available equity to contribute to getting the new business off the ground.
Capacity: Another way that lenders measure your business’s ability to repay a loan is by looking at how capable it is of generating revenues (proven or projected), also referred to as its capacity to pay. If your business has positive historic or forecasted cash flow statements, you’ll be seen as more likely to be able to fully repay a debt, and will be considered a more attractive prospect. They’ll also be looking for sufficient cash flow to run the business on a day-to-day basis, not just enough to make their repayments.
Collateral: Collateral refers to assets your business owns (such as equipment, property, inventory etc) that can be put up to guarantee the loan, and in many cases of small businesses, you can be asked to use your personal assets as security. While collateral isn’t something that’s always required to qualify for a business loan, it can definitely be helpful in taking some approvals across the finish line.
Character: The character of the borrower is evaluated based on the financial history of the business, and lenders will look at a number of factors to get an overall picture. Things like management experience in the industry in which your business operates, a history of paying off business and personal debts, no tax liens, and no active judgments are all “points” towards good character. This is the most subjective of the eligibility factors. A business may be able to repay a business loan (see capital, capacity, and collateral), but positive character shows that you’re willing to make good on your financial responsibilities.
Credit: Naturally, credit scores are a factor in qualifying for a business loan—both personal and business scores. The higher the score, the more likely you are to get approved for a loan, and many traditional lenders have a strict minimum credit score requirement. This means that even if everything else is exemplary, a credit score below that requirement will be an automatic refusal. At least a fair-to-good score is usually necessary to qualify for a loan.
Conditions: Economic conditions relating to the country as a whole as well as the industry of the business are used to decide eligibility. Things like the growth of the industry, the size of the market, and industry-specific business trends are all looked at.
To us, you’re more than a credit score
While there are a number of factors at play in whether a business qualifies for a loan, at Pursuit we look at each individual business as a unique entity. Working one-on-one, we’ll take the time to get to know you and learn the story behind your business. Where there’s a conversation to be had about your situation and business goals, we’ll have it.
At Pursuit, qualifying for a small business loan is more an art than a science. Because of our size and expertise, we’re able to look beyond traditional qualification standards and find ways to make your small business loan possible. In fact, we don’t offer instant online qualification for this exact reason: it prevents us from taking a personal approach to helping fund your small business.
Whenever you’re ready to apply for a business loan, we’re ready to start getting to know you and your business.