Eligibility Criteria For Working Capital Loan: What Lenders Look For

If you are a small business owner looking to access working capital business loans, then understanding exactly what it is lenders are looking for will help improve your chances of being approved. Working capital loans are generally used to cover day-to-day expenses or fund short-term projects, bridging the gap in cash flow. However, lenders need to be sure that borrowers can repay these loans on time and in full. That’s why knowing the eligibility criteria for a working capital loan can put you in a much stronger position when it comes time to apply.

Business Age And Stability

In general, lenders prefer that businesses looking to borrow have been operating for at least six months to two years. Brand new businesses or start-ups may be considered more of a risk because they have no financial data or history to back up their application. A longer track record of operations demonstrates a greater level of stability that lenders are looking for, so if your business has already weathered any financial storms, this will stand you in good stead.

Annual Review And Cash Flow

How much revenue your business receives plays a major factor in your chances of approval. For example, some lenders might require borrowers to demonstrate annual revenues of £50,000 or more to qualify for a loan. However, as well as revenue, lenders may also focus on cash flow. Positive cash flow shows that your business can cover operating expenses and has enough left to make loan repayments. Lenders may request bank statements and other documentation to support this.

Credit Score

Your business’s credit score is also an important factor in determining loan eligibility. This applies to both business and personal credit scores, depending on the lender’s requirements. A strong credit history shows that you have a track record of repaying debts, with a score of 600 or above, enhancing your chances of approval. Businesses with lower scores may still be accepted for loans, but may face higher interest rates or may have to provide collateral or a personal guarantee.

Debt-To-Income Ratio

This measures how much of your monthly income is already committed to debt repayment. A high debt-to-income ratio (DTI) might mean you are less likely to be approved, as it indicates you will struggle to repay additional debt. Most lenders are looking for a DTI below 40 or 50%.

In addition to the above, lenders will want to understand how you intend to spend the loan amount and how you plan to repay the loan. Providing a detailed breakdown of why you need working capital – whether that’s operational expenses, inventory or seasonal increases – will show the lender you are organised and have a detailed strategy for repayment. In some cases you may be required to provide projections for how the loan will help your business grow and improve profitability.

To go deeper into what is the eligibility criteria of a working capital loan​ or to speak to someone about your business options, get in touch with a member of our team here at Century Business Finance.

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