Qualities Lenders Look For in an Attractive Loan Candidate


Whether you are a veteran of success or a fledgling entrepreneur – securing a commercial loan is integral to the growth of your business. Getting the loan you need at a rate you can afford starts with understanding what lenders look for in an attractive loan candidate.

Qualities of an Attractive Loan Candidate

Your creditworthiness is only one of the many qualities a lender will consider before approving your commercial loan. Before diving into the different types of commercial loans for your small business, let’s explore qualities that make you and your company more attractive to lenders.

Clean Financial History

Before a bank decides whether to approve your small business loan, they will dig into the financial history of your company. So aside from creditworthiness, what will they be looking for?

  • Debt: A mountain of pre-existing debt is a red flag for any lender – especially outstanding debt that has yet to be paid down. This signals to a lender that your income may not be able to support the financial burden of an additional loan.
  • Bankruptcy: If you’ve filed for bankruptcy in the recent past – whether it’s been discharged or not – prepare to provide a suitable explanation to the bank.
  • Tax Liens: If your business has been issued a tax lien for not paying taxes on time, a lender will see you as high-risk. While it won’t immediately disqualify you from loan approval, a tax lien may impede the process.
Profitability

Before loaning you any amount of money, a bank will want to see that your business is profitable. While profitability is a key metric in the qualification process for any type of loan, it is especially important if you are seeking a long-term commercial loan with a high capital amount.

Time in Business

Well-established businesses with a successful track record of at last ten years are more attractive to lenders. If you fall into this category, you are considered a more reliable loan candidate and will likely receive a lower APR. Newer businesses or those in the start-up phase can still secure certain types of commercial loans, which are outlined in the next section.

Collateral

Commercial loan candidates with strong collateral to put up are more attractive to lenders. Before a potential lender will sign off on your loan, they will need assurance of their protection in the event of a default. As a borrower, especially one with low credit and a lack of business history, you may be asked to put your home up for collateral or issue a blanket lien against your business. Don’t expect a lender to take a risk on you if you aren’t willing to take on some risk of your own.

A Solid Business Plan

The most qualified small business loan candidates are those with an exceptional financial history and a strong business plan. By taking time to map out your strategic business goals over the next five years, you will demonstrate your level of seriousness and determination to succeed. Share your plan and long-term outlook with your potential lender and be prepared to justify every anticipated expense along the way.

Creditworthiness

Unlike a residential mortgage – which relies heavily on the borrower’s credit score – commercial loan approval is more flexible. Even so, a solid credit score as a business or individual is invaluable when determining your candidacy for a commercial loan. Your creditworthiness shows how you’ve managed money in the past, and indicates to a lender how you might handle it in the future. For most commercial loan types – especially those from local banks and the SBA – your credit score will need to be in the high 600s. Aside from the number itself, lenders will look at your overall credit history to see whether you make on-time payments, have ever declared bankruptcy, have defaulted on past loans and if you repay your debts.

Comparing Commercial Loans

Depending on your industry, needs and timeline, the commercial loan best suited for your business will vary, along with the qualifications for approval. Knowing what to look for in a commercial loan based on your situation and comparing your options is a great place to start.

Traditional Term Loan

This type of commercial loan allows borrowers to secure a lump sum of money and repay it over time. Used to cover a variety of business expenses, term loans are available to borrowers for a designated number of years and are charged at an annual interest rate for the life of the loan. Lenders typically issue either intermediate-term loans (less than three years), and long-term loans (anywhere between three and 20 years).

What to Look Out For

Term loans, especially those of the long-term variety, require quarterly or monthly payments and are collateralized by the assets of a business. The terms of these commercial loans might include a negative pledge clause, which limits the amount of additional debt the entity can take on from other lenders.

Will You Qualify?

Term loans involve an in-depth approval process and require collateral, making them best suited for well-established businesses that need to finance large, one-time business expenses. Lending institutions each have their own loan criteria, but as a borrower, your risk will be evaluated based on the financial history of your business. Banks will only consider strong applicants and approve those with standout credentials across the board.

SBA Loan

The U.S. Small Business Administration makes long-term borrowing more accessible to business owners through its loan guaranteeing program. Acting as a co-signer, the Small Business Administration repays a portion of the loan in the event of a default, making small business borrowers more attractive to lenders at a more affordable rate.

What to Look Out For

Because SBA loans require approval from the Small Business Administration and the intermediary lender, the application process and final approval can take longer than traditional commercial loans. If you need your loan sooner than later, an SBA loan may not be your best option. For borrowers who can wait, a low cost SBA loan might be an appropriate choice.

Will You Qualify?

With APRs hovering around seven percent, it easy to see why SBA loans are so sought-after. The approval process for this commercial loan can be difficult and will require the following:

Established Business: If you are a fledgling company or still in the startup phase, you are unlikely to be approved for an SBA loan. Most banks require businesses to be established for at least three years before signing off.

High Credit Score: Most banks will not issue an SBA loan to borrowers with a credit score lower than 680.

Collateral: These loans are backed 75 percent by the SBA and 25 percent by the bank. The collateral you provide will be split between these two entities, which means the bank will want you to collateralize a large portion of the loan amount.

Personal Guarantee: If you are unable or unwilling to personally guarantee your SBA loan, you will not qualify for one.

Eligible Industry: The SBA will reject even the most attractive loan candidate if their business is in an excluded industry.

Short-Term Loan

If your business needs quick cash flow, a short-term loan can be a great solution. With fast approval times and lower qualification standards, this type of commercial loan is appealing to borrowers on a tight deadline.

What to Look Out For

Due to the nature of this loan, payments are due on a weekly or daily basis, rather than monthly. While this is ideal for some borrowers, be careful to consider the burden a fast-moving repayment schedule might have on your business

Will You Qualify?

If you apply for a short-term commercial loan, expect approval in as little as 48 hours. Approval standards are typically more lenient than with other types of loans, but lenders will review your creditworthiness and business financials before making a decision. Most lending institutions will want to see regular monthly deposits into your business account of at least $7,000 and a credit score above 550.

Commercial Real Estate Loan

Used to secure office buildings, retail spaces, and any income-producing property, traditional commercial real estate loans last between five and 20 years. Unlike SBA real estate loans, traditional commercial mortgage loans are not backed by the federal government. Lenders require monthly installments for a fixed number of years, based on a set amortization period that likely exceeds the term of the loan. A final balloon payment of the remaining balance will be due at the end of the loan term.

What to Look Out For

Most new business entities do not have an established credit rating. If this is the case in your situation, a lender may require you or your business partner to guarantee the loan. This guaranty allows the lender to recover the owed debt from you in the event of a loan default. Some lenders prefer a non-recourse loan in place of a credit rating, which establishes the property as collateral.

Will You Qualify?

Traditional commercial mortgage loans are issued to borrowers with a credit score of at least 700. While some lending institutions will approve this type of loan for a startup company, most will require you to have an established business for one to five years.

If you have bad credit, you may still be able to secure a commercial loan. Hard money commercial loans, for example, consider the borrower’s real estate assets rather than their income or credit score. Reg B commercial loans protect borrowers from discrimination in lending through the Equal Credit Opportunity Act.

Choosing the Right Lender

The bank or credit institution you secure your commercial loan through will impact your short- and long-term business outlook. Be sure to research loan rates, bank services and small business account options available in your area.

Perhaps even more important than interest rates and loan terms, is the relationship you will establish with your lender. Visit local banks and credit unions to get a feel for how they do business. After all, your small business might just depend on it.