Lending requirements aside, how much money you can qualify for is the most commonly asked question. It’s an important one. You should know how much money to realistically expect a lender to give you.
Lenders base loan amounts on the qualifying factors outlined in this article. However, the largest influence on the lender’s decision is your revenue profile. The larger it is, the more money you can usually expect to receive.
A good rule of thumb is that you will qualify for a loan equal to about 10 percent of your revenue for a given payback period. This percentage varies by lender and loan product, sometimes dropping as low as six percent or rising as high as 15.
Examples can help solidify the concept. Two are found below.
It’s October and you need short-term working capital in the amount of $24,000 to cover an inventory purchase for the holidays. To minimize the cost, you would want to get a loan with the shortest term possible.
We would look at your annual revenue, hypothetically $480,000, and divide it by 12 to arrive at your monthly average revenue of $40,000. Based on those figures, you would qualify for the requested loan amount at a term of six months.
If you were a larger company experiencing growing pains, you might need money for a building expansion. With annual revenues of $1 million and a building project estimated at $150,000, you would need to take out a loan with a term of at least 18 months.
Those are only two examples, but they illustrate the rule. $24,000 from $480,000 is lower than 10 percent, which means you can ask for and probably get a shorter term. In the second example, $150,000 exceeds the 10 percent cap. This explains why the loan has a lengthier term.
What Do I Do If I Don’t Qualify?
While you’re more likely to be approved by an alternative lender, that doesn’t mean you always will be. If you’re turned down for a loan, here are a couple of things to do.
Try to find out specifically why you didn’t get the loan. Ask the representative to explain the decision and what you can do to qualify in the future.
Apply for Other Types of Loans
Depending on the reason you didn’t qualify in the first place, you may want to submit a loan application with a personal loan lender.
The other reasons you might not qualify are usually due to at least one of the qualifications. In most cases, you can take action to improve them.
- Credit Report. If the issue is your credit score, get a copy of the report and develop a plan to improve your score. It can be beneficial to partner with a financial advisor.
- Time in Business. There is no way around this particular qualification expect patience. Put in your two years and go back for funding then. By the time you do, you’ll likely have grown and have different lending needs. The first time you needed capital for inventory; now you need to hire more employees.
- Business Entity Type. This qualification is an easy fix. You should update your company’s structure to an LLC or S-Corp.
- Revenue. It’s tough to overcome this factor but not impossible. You can sometimes supplement business revenue with income from another job and get an unsecured personal—not business—loan from some of the new online lenders.
- Public Records. Bankruptcies and tax liens are the most difficult to overcome. If you have a tax lien on the business, you will have to clear it up first before approaching a lender. No reputable lender will give you a loan until you do; you’re too high of a risk, even with solid revenue and a good credit report.
Grow Your Business with Working Capital Financing
Working capital is a necessity for small businesses, but it can be hard to get when working with traditional bank lenders. Fortunately, you have more lending options today. You can work with an alternative lender like RapidAdvance who will deliver an exceptional customer experience. By working with RapidAdvance, you can get the capital you need to grow the business and its profits.