While every underwriter may consider various criteria (and weigh one criterion more heavily than another), the majority of lenders simply want to know that your small business will make payments on-time. Some of the key information reviewed by underwriters during the application process includes:

• A Business’s Revenue (Both Annual and Monthly):

  This essentially comes down to basic math, and if a small business is not generating enough revenue to make consistent payments, a loan will more than likely be denied. Lenders will often utilize what’s known as a ‘revenue to loan ratio’ in an effort to determine the exact amount that they will actually lend in the event of an application approval. While this ratio can vary on a case-by-case or lender-by-lender basis, it’s typically assumed that a small business should not anticipate being approved for a loan that is any sum above 10% of your annual revenue. When analyzing your small business’s monthly gross revenue, that factor may actually fall somewhere between 50% and 100%. Furthermore, the final amount approved in a small business loan will likely hinge on the amounts (and current statuses) of any additional business loans or lines of credit.

• The Small Business Owner’s Personal Credit Score:

  While many small business owners do not realize this fact, an individual’s personal credit score can actually have a major impact on whether or not a company loan is approved. An underwriter will review your credit history and search for ‘red flags,’ such as late payments, bankruptcies, number of lines of credit, overuse of credit, and more. The small business owner’s own personal dedication to repaying creditors can be viewed as an indication of whether or not the individual’s business will also pay on-time. Accordingly, most traditional lenders will look for a minimum credit score of 620 when applying for a conventional loan (by comparison, if you apply for an FHA mortgage loan, the minimum credit score is 580). But the vast majority of traditional lenders are typically looking to see a credit score that is 700 or above. In essence, the lower a small business’s owner’s personal credit score, the more expensive the financing terms of the loan.

• Collateral:

  While every lender doesn’t require collateral from potential debtors, the majority of banks ask for some form (and the SBA has such a requirement). While the SBA won’t always require that a small business loan is ‘fully collateralized,’ they will more than likely require that any and all collateral you have “available” is provided. Furthermore, a number of online lenders will apply a general lien on business assets (although some merchant cash advance providers will not). A personal guarantee on small business loans is something that the vast majority of lenders – even traditional lenders such as local or community banks – will likely require.

• Personal Equity:

  As a small business owner, it’s important to realize that underwriters may want to know how much money you have personally invested in your business. For example, underwriters may look at whether or not you assisted (financially speaking) with things like startup costs, etc. This could be viewed as an indication of your personal commitment to the success of the company. If you, as a small business owner, can demonstrate through past action that you have what’s commonly referred to as “skin in the game,” or “something to lose” if the business fails, underwriters might view your application more sympathetically.

• A Business’s Debt Service Coverage Ratio:

  You may be wondering what, exactly, a debt service coverage ratio entails. Basically, it’s a calculation of a business’s income as well the total amount of financing. You can calculate this ratio by dividing your business income by your total annual debt service costs (which equals all the principal and interest you pay annually). As a general rule, small businesses with a debt service coverage ratio of below 1.25 have a difficult time securing traditional financing.

• A Business’s Debt-to-Asset Ratio:

  This ratio helps underwriters anticipate whether or not you have enough assets to cover a loan in the event of a default. If there is NO collateral requirement for your specific loan, this ratio becomes of particular importance to underwriters. By analyzing your business’s debt-to-asset ratio, the underwriter can review if you have enough assets – whether equipment, property, or another form – to potentially liquidate and cover the loan in the event that regular payments are not being made. As a general rule, underwriters prefer to see a ratio of more than 1:1 (meaning more assets when compared to the total amount of the loan you are borrowing).

• A Business’s Loan-to-Value Ratio:

  Note that this only applies if your loan requires collateral. In such cases, said collateral should at least be equal to the amount you are borrowing. But more often than not, underwriters will prefer to see that your collateral is worth at least 20% more than the amount you wish to borrow. It’s why lenders typically request a 20% down payment for things like cars or homes – and that same ratio can apply when seeking a small business loan.

• A Business’s Net-Worth-to-Loan-Size Ratio:

  Your company or personal assets (total net worth) are another major consideration reviewed by underwriters throughout the small business loan application process. In an effort to ensure that you can actually afford to repay the loan every month, underwriters will hope to see a 1:1 ratio of financial assets and liabilities when compared to the total amount of the loan.

• Other Sources of Repayment:

   While not a hard and fast rule, some underwriters may examine other (or alternative) sources of income to help better determine whether or not you will repay a loan. Such alternative sources of income might include a guarantor, insurance policies, or an additional income stream from a separate job.