Types of Credit Appraisal Methods for Your Business Loan
Credit appraisal is the process whereby a loan’s applicant application is reviewed to determine the ability of the applicant to repay the loan. Lenders that provide small business loans conduct credit appraisals to have a high assurance of getting their money back. The appraisal confirms that you can pay the money back on time without late payments or missing any payment.
The credit appraisal process is quite comprehensive, and lenders check various things like your business finances, managerial prowess, market viability, and others. Each lender has its credit appraisal method. The following are the different types of credit appraisal methods for business loans.
Credit Score
The first thing that lenders check is your credit score. This refers to a score given to borrowers depending on their credit history. Reports from credit bureaus provide that credit scores. The higher your credit score, the safer you are. So, if you want to apply for small business loans, you should ensure that your credit score is as high as possible. If your credit score is not the best, you can take steps to improve it or contact an alternate lender.
Time in business
Some lenders factor in the length of time a business has existed before considering it for a loan. They believe that companies that have been in existence for a long will find it easier to repay a loan than a new business.
Business revenue
Business revenue is another appraisal method used by providers of small business loans. The higher the business income over business expenses, the greater the chances of obtaining a loan. Lenders believe that businesses with adequate business revenue will continue to trend upwards after being given a loan to expand their business. Thus, this will enable them to repay the loan quickly and without delays. On the other hand, they believe that firms with dwindling business revenues commonly have problems with loan repayment.
Recurrent positive cash flow
Lenders often prefer businesses with recurring cash flow instead of organizations that periodically earn lump sums of money. They believe that regular cash flow will enable a company to make monthly loan repayments without issues or complications. The more streams of cash flow that flow into your business monthly. The higher your creditworthiness. If your business cash flow is negative, your appraisal goes into the negative too, and it becomes more challenging to obtain a small business loan.
Asset base
Lots of small business owners use business assets as collateral to facilitate a small business loan. So, the more valuable your business assets, the better your credit appraisal valuation is.
Liabilities
Lenders will consider both your current and fixed liabilities before determining your creditworthiness. The more weaknesses you have, the less willing lenders will be to give you a loan. Usually, they believe that businesses with more liabilities will find it harder to repay their loans. So, suppose you want to obtain another small business loan. In that case, you can find a way to consolidate various liabilities and make them fewer. That way, you won’t be servicing too many liabilities or loans at the same time.
Tax history
Some lenders will ask for your tax history and filings before giving you a loan. The more consistent you are with paying your taxes, the better your credit appraisal will be. Present your taxes as early as possible and pay them early. Keep recordings and ensure to inform the government of any discrepancies.
Industry/business viability and future outlook
Some lenders will have a look at the future outlook of your industry to determine its viability. They will estimate your future revenue and use that to evaluate how creditworthy your business is.
Conclusion
Banks and other financial institutions use these popular credit appraisal methods to check small businesses before giving them loans. With this, you can know what lenders expect and how to meet their expectations.
Cover Photo by Freepix
About the Author
Bibhuranjan Editorial Officer, technofaq.org I'm an avid tech enthusiast at heart. I like to mug up on new and exciting developments on science and tech and have a deep love for PC gaming. Other hobbies include writing blog posts, music and DIY projects.
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