Understanding the Business Loan Credit Assessment Process

Also known as the credit analysis process, the credit assessment process is when lenders review your application to determine whether your business can qualify for financing. It’s at this point that lenders will employ a variety of techniques, like credit analysis, cash flow analysis, risk analysis, trend analysis, financial projections, and more, to come to a conclusion about your eligibility. As your business comes under scrutiny, the credit assessment process is understandably a nerve-wracking time. After all, the lender may reject your application, leaving you to start from scratch looking for financing.

The good news is that with an in-depth look into lender requirements and understanding why lenders operate the way they do – you’ll set your business up for a stronger application and greater approval odds. Here’s what you need to know about understanding the business loan credit assessment process.

What Credit Criteria Do Lenders Use to Determine Business Loan Qualifications?

Credit requirements vary from lender to lender and across various financing products. That said, a score of at least 680 is generally the baseline traditional lenders will accept. Anything lower than that and you may run into hurdles trying to get approved. On the other hand, some fintech lenders and other financial institutions maintain products specifically geared towards businesses with lower credit scores or those without established credit history. Learn more here. Alongside your credit score, lenders will also use the following criteria to determine whether you qualify for a business loan.

Time in business
Personal credit score
Business revenue
Business bank statements (i.e. the number of deposits, average daily balance, months ending balance)
Entity type
Industry type
Profit margins
Cash flow
Collateral (if you’re seeking asset-based financing)

Why Do Lenders Care About ‘Time in Business,’ ‘Bank Statements,’ Etc?

Criteria like your credit score and cash flow statements help lenders understand the financial condition your business is in – or more specifically, whether they can expect you to repay your loan. These criteria allow lenders to determine how risky it is to lend you money. The more risk, the less willing lenders will be to approve your application. Riskier borrowers may also have to contend with higher interest rates or collateral requirements. Lenders use collateral as another way to hedge against risk. Should you be unable to make your loan payments, they’ll have the right to seize the asset you’ve used as collateral. Collateral loans are also called secured loans and can include products like equipment financing, commercial mortgages, and accounts receivable financing.

How Do Lenders Approach Risk Tolerance?

Lenders will gather and review information about your business to determine whether to approve your application. They will look into your credit history, both business and personal. They will also use your business’ financials, like bank statements, as additional data. All this information will undergo rigorous analysis until the lender reaches a final conclusion. It’s typical for the business loan credit assessment process to take anywhere from a couple of weeks to months – especially if you’re working with a traditional lender. If you need funds sooner, try exploring fintech lenders. National, for instance, can get you approved for a business loan in hours. Keep in mind that each lender’s perception of risk can fluctuate and there will be times when it’s easier to get financing than others. The state of the economy, your industry’s performance, and interest rates all play a role in how lenders view risk. It’s possible your ability to secure certain products, lending amounts, or rates can change depending on market conditions. Most recently, the 2020 pandemic saw a number of small businesses close their doors permanently. Others struggled to stay afloat throughout government shutdowns and reduced demand. As a result, banks and other lenders tightened their requirements.

How Might We Expect Credit Criteria and Underwriting Criteria to Change in 2021?

As vaccines become increasingly prominent and government restrictions ease, we should expect to see more businesses reopen. Estimates show that GDP growth in Q1 2021 was already up by 6.4%. This is good news for the economy and great news for small business owners looking for financing. Expect some lenders to ask you about your business’ strategy during the pandemic. They may want to know how your industry and business was affected. They will also want to know how your business performed throughout 2020. Understanding your performance throughout the pandemic gives lenders an idea of how your business might perform during another crisis. Some lenders might be understanding if your revenue dropped throughout 2020. If this is the case, make sure your strategy for the next phases of growth is clear. In some cases, lenders may ask for a business plan.

Speed up the Business Loan Credit Assessment Process with National

Don’t feel like undergoing a business loan credit assessment process that can take weeks or months – only for the possibility of being rejected? You’re not alone. Small businesses time and time again opt to work with National, an online marketplace of over 75 different lenders. We maintain a variety of financing solutions, from small business loans to lines of credit and more – for all credit score ranges. Fill out our 60-second application and a Business Financing Advisor will get in touch with you to discuss personalized solutions!