When you’re applying for any kind of small business loan, just like any other major loan type, there will be a few major factors that influence whether or not you and your business qualify. Knowing these in advance is vital, as it helps you prepare the certain areas so you’re likely to be approved for the exact loan type you require.
At Michigan Certified Development Corporation, we’re happy to offer small business loans to Michigan clients from several different lenders, and we’ll walk you through precisely which factors are most important as they pertain to your loan qualification. In this two-part blog series, we’ll give you a broad primer in this area to keep an eye on if you’re considering any kind of small business loan application.
Credit Requirements
Just like any other major loan type, you’ll be required to have a certain credit score in order to qualify for a small business loan. Many lenders maintain a minimum credit score in their loan policy. The SBA, however, does not have a minimum credit score requirement but will require an explanation for any score beneath 650.
To be clear, both the owner’s personal credit and the business’s credit are considered in this regard. If you fail to meet the credit requirements, it doesn’t matter how viable your business or its loan proposal would be – you simply don’t qualify.
Cash Flow and Income
Another important qualification factor is a specific measure of your business’ cash flow. In general, lenders will look closely at your debt service coverage ratio (DSCR), which refers numerically to how your business cash flow to your payments on your debt. For instance, your lender will compare your EBITDA (earnings before interest, taxes, depreciation and amortization) to your annualized debt payments including interest on a line of credit assumed fully-funded. A ratio of 1.20x or better is considered good. With SBA loans, if the DSCR is below 1.00x, you will have to provide projections for future earnings along with reasonable assumptions, that show the ability to service the debt going forward.
Businesses with historical DSCRs in excess of 1.50x will typically be approved very quickly..
Business Age and History
While it’s not usually one of the largest factors in the qualification process, lenders are nonetheless interested in how long your business has been in operation. Generally speaking, businesses that have been operating for longer periods of time are much more likely to be approved for loans compared to companies that have only just opened their doors recently.
This is due in large part because lenders generally prefer to work with clients who have a track record of responsible business practices. Having this history is crucial when applying for loans, as it provides evidence that you’re able to pay back what you borrow in a timely manner. For an SBA 504 loan, to mitigate the newness of a business (defined as operating for <2 years) the borrower will be required to inject additional equity toward the purchase of an asset. For a SBA 7(a) loan, additional collateral may be required.
For more on the factors that play a big role in qualification for a small business loan, or to learn about any of our SBA loans or other programs in Michigan, speak with the team at Michigan Certified Development Corporation today.