Business Loan Eligibility – 9 Things to Know

07-June-2024 16:19
in Commercial
by Sam Hodgson
Business Loan Eligibility – 9 Things to Know

Business loan eligibility - There are a variety of business finance solutions out there, all with varying criteria, risk profiles and purposes.

A business loan could be the best next step for your business, helping you expand the company and start a new chapter. But what do you need to have in place to show lenders that your business is able to pay back that loan? In this short guide, we take a look at business loan eligibility and offer advice for anyone looking to get that helping hand they need to grow.

The Five Key Points of Business Loan Eligibility

We understand how busy running a business can be.

Here are the five most important points:

  • Lenders will look at a range of criteria that includes your business age, credit score, income, assets and business sector.
  • Your personal finances may well be under scrutiny, too. Make sure it is well-managed.
  • Prepare your documentation in advance to avoid mistakes.
  • Write a good business plan to explain your business needs and prove your reliability.

It's worth seeking the help of a specialist business finance broker to access market-leading rates and tailored finance solutions. 

Business Loan Eligibility


How Much Could I Borrow?

 1. Business Age - Showing Your History

2. The Importance of Credit Scoring

3. Revenue & Net Operating Income

4. The Business Sector

5. Company Assets & Asset-based Finance

6. Personal Credit History

7. Other Factors That Affect Loan Applications

8. Business Loan Documentation

9. Mistakes to Avoid

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How Much Could I Borrow?

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1. Business Age - Showing Your History

The age of your company is one of the first criteria any lender is going to look at.

Businesses that are under two years old cannot reasonably be expected to show the same level of viability as a more established enterprise.

Lending is all about risk, so showing that your company has been in business for a while and is capable of standing on its own does a lot to mitigate that risk and reassure lenders.

That doesn’t mean that companies younger than two years cannot get loans - far from it - but the type of finance these businesses should be seeking is that specifically designed for startups.

Startup finance has been developed by lenders willing to take the risk of an unproved company and provides specialist loans in that sector.

In short: Companies with a proven positive history find it easier to secure general business loans than younger companies.

2. The Importance of Credit Scoring

Understanding the credit scoring system is another key factor in determining loan eligibility.

We are all used to a personal credit score, and a business's credit score operates in the same manner.

Actions that you have taken that show good financial reliability, such as paying bills on time, building up savings, and making sensible use of existing lines of credit, all work towards raising your credit score.

Those that indicate flakiness will take from that score, such as missing loan repayments, over-reliance on credit, and large outstanding debts.

It is very important to build up a strong credit history from the very early days of your business to provide future lenders with an understanding of your company.

In this way, easy-to-manage lines of credit are often a plus rather than a negative. One example is company credit cards that can be used sensibly for business transactions and paid regularly to create a record of reliable payments.

Companies with no credit history are often regarded as just as risky as those with a poor credit score, as they do not provide prospective lenders with any data to show reliability.

Companies that are very young, as well as those that are sole traders or partnerships, will also have their personal credit history strongly taken into account. For more information, see “Personal Credit History” later in this guide.

In short: Building and maintaining a good credit score is important when considering a business loan.

See similar: Understanding Business Loan Interest Rates

3. Revenue and Net Operating Income

A business must be seen to have income for a lender to consider them for a loan. Your annual revenue will be a baseline that helps lenders determine the maximum size of any offer, as naturally, businesses with a relatively low turnover would be a significant risk for a large loan.

Net Operating Income (NOI) is a figure calculated based on total income minus operating expenses. Lenders use it to determine your suitability for a loan.

Many lenders would expect to see a total income that is at least 1.25 times your operating expenses, meaning that there are enough available funds to make loan repayments comfortably.

In short: Your business must show it has enough income to make loan repayments without struggling.

Read blog: Business Loans for Limited Companies

To learn about business loans for limited companies, watch our short video below.

4. The Business Sector

Many lenders will take your type of trade into account when considering you for a loan.

As with other factors, this is a way for them to offset their risk. Companies in sectors that are proven to be profitable are more likely to get approved for a business loan than those in more risky businesses, while some sectors, such as gambling, may be blacklisted by certain lenders.

Additionally, lenders will be aware that some businesses require greater levels of investment to be successful and will be more flexible regarding the size of the loan to further those needs.

While there is nothing you can do to improve this (it is unlikely you plan to change your business type to fit lenders' needs!), it is something worth considering prior to making an application.

In short: Your industry may have an effect on your loan viability.

5. Company Assets and Asset Based Finance

There are both unsecured and secured business loans available. If your company has assets that can be used as collateral against a business loan, then it is worth exploring asset-based finance.

Assets are not limited to buildings or land but also include business equipment, machinery, vehicles, and even intangible assets such as your accounts receivable.

A secured loan moves some of the risk away from the lender - by providing a guarantee for them that if repayments are not made, the asset becomes theirs to sell. This risk offset means secured business loans have some advantages over unsecured loans.

Often, they are easier to obtain, especially if your business has a weaker credit score, while they also tend to come with a lower rate of interest.

However, you must always remember that failing to repay a secured loan will lead to the permanent loss of the associated assets.

In short: If your business has assets to use as collateral, a secured loan may be a good option.

6. Personal Credit History

While much is done to separate business financials from personal ones, it is still the case that your personal finances and credit history may have an impact on your loan application.

This is always true for sole traders and partnerships and can also often be true for directors of limited companies.

Your credit score may affect your loan in two ways. The first is more obvious - if you have a poor credit history yourself, it may stop you from obtaining a business loan.

As for the second, it is often not considered that if you have access to substantial personal credit, your business loan may be rejected. This is because lenders fear you will lean on that personal credit if your business begins to struggle, making your business stability riskier in the long term.

In short: A good personal credit history is important for many business loans, while excessive levels of personal credit may be a hindrance.

7. Other Factors That Affect Loan Applications

There are a few other factors that can influence a loan application in a small number of cases.

These are usually because specialist loans have been set up to help a certain segment of the population.

These loans have been developed for cases where perhaps a standard loan doesn’t fit or would otherwise be rejected, and include (among others) loans for:

  • Startups
  • Businesses with a specific remit, such as those focused on environmental issues
  • Research and development
  • Specific use (such as expansion or for equipment)

In short: Some loans are designed for specific purposes, so be sure to check you fulfil basic eligibility in these cases.

8. Business Loan Documentation

When looking at applying for a business loan, it is essential that your documentation is complete and presented as professionally as possible.

Documentation is typically provided in two stages - at the time of application and upon request by the lender during the assessment period.

Information you will need to provide to apply usually includes:

  • Your full name and contact details
  • The business's full name and contact details
  • Start date of the business
  • Business industry sector
  • Business annual revenue
  • Your personal bank account information
  • Size of loan
  • Reason for loan

You will also need to prove your identity and that of your business through documentation such as a passport, business company registration number, and proof of registered addresses.

Additional information that may be requested includes:

  • Company accounts, including profit-and-loss sheets, bank account statements for two years, balance sheets, tax returns
  • Personal financial details, including credit score, bank account statements, credit card statements, mortgage and home finance, car and other loans, investments and other assets
  • Business plan or project plan to show your commitment to your business, its planning, and thus, your viability
  • Life insurance for you and other directors and business partners

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9. Mistakes To Avoid When Applying for a Business Loan

It is all too common to make mistakes when making a business loan application.

While some of these are easily rectified, others can be considerable and affect not only this loan application but your ability to secure financing in the future.

Take care to consider all of the following:

Lying On Your Application

More common than it should be, some people believe that a “white lie” here or there cannot hurt.

Whether this is exaggerating your ability to make repayments or adjusting a few figures to make yourself seem more stable than is really true, it is a huge mistake to make.

Businesses that do this can find themselves blacklisted from future applications as well as failing to get the credit they are applying for. Lenders do check!

Not only that but even if successful, you are more likely to find yourself in financial difficulties later on - those eligibility checks are there to help you remain above water.

Poor Business and Project Plans

A business plan is a document that presents your business to the lender, while a project plan is a similar document for established companies to present a specific need that they are hoping to finance.

It is the best place to make the case that you are suitable for the loan and to provide long-term planning that convinces the lender that you are not a substantial risk.

A well-developed business plan shows more than just the figures contained within it; it also proves that you have considered potential pitfalls and have put reasonable methods in place to mitigate those.

Failing to take care when writing a business or project plan is a simple mistake that is easily avoided. If needed, consider investing in professional help with your business plan to avoid these problems.

Making Major Business Changes

Unless the changes are the reason for the loan (for example, a considerable expansion), applying for a business loan during a time of instability is a bad idea.

Lenders are looking for low-risk customers and expect you to show that your business is solid and stable, doing the thing it has been successful in doing thus far.

Having Your Head in the Sand

One further mistake comes when businesses apply for loans when they are not totally aware of and fully accepting of their true financial situation.

You should take the time to find out your business's credit history and make a full analysis of your accounting before you consider making a loan application so that there are no surprises on the way.

Not knowing your own business's finances does not fill a lender with confidence!

Missing Deadlines

Have all your documents ready before you begin the application.

You are trying to convince the lender that you can make each monthly payment on time without fail - being late when sending a requested file to them doesn’t show the reliability they are looking for.

Make sure you prioritise any loan communication in your day-to-day workflow, and never give the lender a reason to question your professional punctuality.

Business Loan Eligibility

How We Can Help

Getting a business loan can be easy when you have professionals helping every step of the way. Our team of specialist brokers have extensive knowledge of the market and can offer you expert guidance.

We can advise you on the best path for your company and will help you find the financing that you need.

At Clifton Private Finance, we can guide you through every step of the loan application, find the right loan to suit your business and help you with documentation to give you the maximum chance of a successful application.

If you need business funding, call us on 0203 880 8890 or book a free no-obligation consultation below.

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