As a new business or any business which has been established for less than 2 years, it is possible to qualify for a term loan under specific circumstances, but the likelihood is much lower than if your business has been more established. To qualify for a term loan, lenders will evaluate some of the following: time in business, business credit score, business assets and liabilities, business owners credit history.
All in all, lenders normally use the 3 C’s principle to evaluate businesses applying for loans:
The lender will check your personal and business credit report to assess the kind of borrower you and your business have been in the past. Whether you were an honest borrower or a difficult one for previous lenders to deal with. In case you were a difficult borrower, lenders will try to evaluate what caused it and whether it was due to spending beyond your ability to pay back the loan. This is called character.
Your business's revenue, free cash flow, or any collateral is considered while calculating your credit capacity by the lender. Greater revenue and free cash flow empowers your repayment potential and thus makes lenders confident, while lending you the money.
The capacity to repay the loan is also considered by the lender when they decide to set a loan amount for you. The business cash flow, existing expenses and your proposed new loan payment are considered to determine how much debt/expense payments the business can handle. If your cash flow is high enough to accommodate the existing obligations, including the new loan payments, your capacity will be seen as good.
However, in most cases, newly established businesses lack strength in most of these areas which are critical to a lender's decision making about whether or not your business will get approved for a term loan.
Don’t be discouraged, there is a light at the end of the tunnel for new businesses. Term loans are only one of many ways a new business can obtain the funding they need. Check out other business funding choices here.
