Working capital loans can be an invaluable lifeline for many small and medium size enterprises (SMEs). They offer quick access to the funding you require to manage daily operations, covering expenses such as rent, payroll, cash flow gaps and even fuelling short-term growth opportunities. But, before you apply, it is essential that you have a firm grasp of the eligibility criteria of your chosen lenders.
Lenders don’t approve every application that crosses their desk, and for good reason. They need to be sure that their investment is going to be repaid according to the agreed terms. That means they closely assess the various financial, operational and personal factors attached to each loan. If they decide the business is in good health and a safe bet, then they will approve the loan. If not, they will either make the terms more favourable to them or reject the application completely.
However, what this does mean is that it is possible for you, with a good understanding of the criteria, to make your business appear a more appealing proposition. Here’s what you need to know.
Most lenders will only approve a business loan for working capital to organisations that have been in operation for at least six months to two years. Start ups or new businesses have no means of proving they can cover the repayments with revenue (although different funding options exist for them).
Lenders are looking for businesses that generate consistent revenue, with some having a minimum annual requirement of £50,000 or £100,000. If you do not quite reach these figures, then you will need to demonstrate stronger evidence of future cash flow predictions or give personal guarantees.
Both your personal and business credit scores play a major role in eligibility. A higher credit score indicates that you exhibit responsible financial behaviour. Low scores can be red flags for lenders, and you may be subject to higher working capital loan rates. You don’t need to strive for perfection, but a clean payment history and low credit utilisation will work in your favour.
Cash flow can be a critical factor in your eligibility. Even if your revenue is good on paper, lenders need to know you have the liquidity to repay any loan you take out. Overdrawn accounts or cash shortages are signs that this may not be the case.
Some industries, such as hospitality or construction, are generally considered higher risk by traditional lenders. However, there are some specialist lenders who grant loans in these sectors. So, it’s worthwhile doing your research and approaching leaders who are familiar with the demands of your industry.
If your business already has existing loans or debts to repay, then your debt-to-income ratio may well be high. This is a warning to lenders that you may not be able to afford to take on any more debt at this time.
If you fall short of any of the above criteria, then don’t panic; there are still options available. You may choose to work with an alternative lender who accepts lower credit scores or who lends to new businesses. You can also offer collateral, in the form of personal guarantees, to reduce the lender’s risk. Or you could apply with a co-signer or partner who has a stronger financial position.
If you would like to know more about working capital loan eligibility, then get in touch with our team here at Century Business Finance. We are always happy to talk through your requirements.
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