Business Grows When Cash Flows

Small Business Lending: Loan Awareness & Credit Scores

Diving head-first into the world of small-business lending can be an intimidating prospect – especially if you have never needed a loan before. Before you shop around and apply for loans at different institutions, it is important that you do your homework and consider several different factors to ensure you make an educated borrowing choice.

Know Your Objectives

Your first priority when shopping for a loan should be finding an option that best fits your business’ needs. What are you trying to accomplish? How much funding do you want? Is the number you’re looking for really what you need? Most importantly, can you afford to borrow this amount?

Figuring out how much your business can afford to borrow involves calculating your debt service coverage ratio (DSCR), which is your cash flow divided by your loan payment. Lenders will expect you to have a DSCR of at least 1, which signifies that you will at least have enough cash on hand to keep up with your monthly payments. Since emergencies can happen, however, it preferred to have a DSCR of at least 1.35.

If your assets and the amount of debt you can comfortably cover match up, excellent! If not, you may need to take a step back and set a smaller goal that builds towards better financing for the future. The last thing you want is to bite off more than you can chew and have your business swimming in debt.

Know Your Credit Score

While it may seem counterintuitive for a lender to care about your personal credit history when you are looking for funding for your business, the truth of the matter is that lenders see a business owner’s own personal finances as an indicator of how they will run their business. To know where you stand, it is important you find out your credit score before seeking a loan. Certain credit card companies will include this score on your monthly statement or allow you to view in your online account. Otherwise, the three main credit reporting bureaus – Experian, Equifax, and Transunion – are legally required to provide you with one free credit check per year.

Depending on your score, your options will likely be as follows:

  • 700 or above: Your credit history is excellent. You will have excellent lending options from multiple sources.
  • 650 to 699: Your credit is still good, and you will still have plenty of borrowing options.
  • 575-649: Your credit is considered average. You will still have borrowing options, though likely at higher interest rates.
  • Under 575: Your credit is considered poor and will have limited borrowing options.

If your credit score is lower than what you would like it to be, do not despair. There are several ways that you can gradually work to improve your credit score over time, including making consistent monthly payments, improving your debt to credit ratio, and disputing any inaccurate information on your credit reports.

Other Factors Lenders Consider

While your credit history is important, it is not the only factor that will influence whether or not you will be approved for a loan. Other important factors will include the amount of time you have been in business, your business’ annual revenue, and your business’ average bank balance at any given time. Companies that have been in business for more than two years and maintain a generally positive cash flow are generally considered to be less risky and will be approved much more easily.

Los Angeles Business Loans Made Simple

If your business is having trouble securing a loan for any reason, whether it is due to your business still being in its infancy or poor credit, contact Green Ocean Solutions today. We make small business loans quick and simple and can help you get approved for the funding you need to meet your goals. With easy approval in as little as 24 hours for loans up to $2,000,000, we can help you find a solution that is right for you. When banks say no, we say yes!

Apply online or call (888) 997-2179 today to get started.