Are you struggling to secure finance for your business? Or do you feel that the terms of your loan are not very profitable? No worries as most entrepreneurs pass through this phase in their business. There is always a scope for improvement and you can take certain steps to increase the chances of qualifying. Of course, how you can improve your chances depends on your financial performance and the nature of your business. Some entrepreneurs are best served by building a credit history. Some people can benefit more by choosing a different loan structure, term, or type. Here we will learn more about the qualification criteria for fast business finance.
What are the top qualification criteria for fast business finance?
Most 2nd mortgage lenders use a system called the 5 C’s to assess the risk of lending to potential borrowers. By weighing these five characteristics of the borrower and the loan, the lender determines the probability of default. Lenders approve, reject, and (partially) set interest rates based on the 5 Cs. The 5 Cs are:
1. Credit
This will be reflected in the applicant’s credit history. If your credit score is low, you should work on improving your score before applying. Once you understand how your credit score is calculated, it becomes much easier to adjust and improve your behavior. According to FICO, credit scores are calculated using five categories, each weighted differently. The table below shows these categories, their weight in calculating your credit score, and how you can improve them.
Category | Percentage in Credit Score | Method of Improvement |
| History of Payments | 35 | Pay all the debt payments & EMIs in full and on time. |
| Amount Owed | 30 | Do not use all the available credit at the same time. Whenever possible, pay the credit. |
| Credit History Length | 15 | Make a long credit history by using the same business account instead of multiple accounts. |
| New Credit | 10 | Do not open many new accounts in a short duration |
| Credit Mix | 10 | Do your best to pay all types of credit on time. |
Keep checking your credit score daily to stay on top of your score. It will increase your chances of qualifying for a caveat loan in Australia.
2. Capital
If the small business loan you are looking for requires a down payment, offer to pay the most significant possible down payment. It increases your chances of qualifying for a loan in two ways. First, it reduces the total amount borrowed, reducing the lender’s overall risk of loss. Second, a large down payment shows the 2nd mortgage lender that you are in the game. It is essential because borrowers with large sums of money are motivated not to default. Even without a down payment, business loan lenders prefer borrowers with high capital over those with low capital. So, save if possible before applying for a small business loan. The more money you save, the more likely you are to pay off your debt.
3. Capacity
If your debt-to-income ratio is near (or above) 36%, reducing it can significantly increase your chances of qualifying for a caveat loan in Australia. To reduce this ratio, you can do one or more of the following
- You need to reduce your debt quickly by increasing monthly payments.
- Adjust your spending behaviour to avoid adding to your debt. Please avoid additional financing for the time being.
- Finally, delay your purchase so you can pay a more down payment.
Also, remember that spending behaviour is crucial in lowering your debt-to-income ratio. Set up a simple spreadsheet to track your monthly percentages to improve your spending habits. Seeing concrete progress will keep you motivated and increase the chances that a reputable online financial institution will offer your business loans.
4. Collateral
Possessing valuable assets such as inventory, equipment, or property can make qualifying for a loan much more accessible. If the borrower defaults, the 2nd mortgage lender takes the collateral. Once the lender owns the security, it can be sold, thus recouping any losses. Ideally, the lender has no reason to take your collateral. However, it helps mitigate downside risk for lenders and makes qualifying easier.
In many cases, posting collateral also reduces the overall loan cost. In many cases, you will be asked to sign a personal guarantee. By signing this document, you agree to repay the business loan. If you cannot repay the loan balance, you will have to pay it out of your assets.
5. Conditions
Business loans come in many forms. In addition to term loans and business lines of credit from traditional commercial banks, there are other business lending options such as equipment and inventory Loans, cash advances, micro-loans, accounts receivable financing, bridging loans, caveat loans Australia, etc. Each of these financing options has a different structure and eligibility criteria.
For example, accounts receivable financing requires the sale of invoices at a discounted price in exchange for cash advances. The invoice shows the lender’s value, so all the lender cares about is the likelihood that the customer will pay. It means customer creditworthiness, not your creditworthiness, is an essential eligibility criterion for accounts receivable financing. Check your business plan and financing needs before pursuing financing options. It will help determine the best credit option for your small business.
End Thoughts
The best part is that you can consider only some of the suggestions mentioned above once to secure your business loan. Start where you can make the most impact with the least effort. Build on that, and before you know it, you will fund your business with the best fast finance.