Alternative business finance can be a useful tool to boost cash flow, get your business through a rough time, or take it to the next level. Whatever the purpose of the funding may be, there are many different eligibility criteria for different types of finance.
Here’s what you need to know about eligibility to prepare for your business finance application.
What does eligibility mean?
In essence, eligibility is a state or indicator that helps your finance provider to assess how creditworthy your business is. This can either mean whether your business is eligible to borrow money or not, or how much money your business will be able to borrow.
This is important, and a key safety point for your business and the lender — no lender would want to give you funding you can’t afford to repay. When assessing your eligibility, the lender will need some information from you that proves how your business has been trading in the past. Let’s take a look at the documents you’ll need to provide and how you can prepare for the assessment.
How does it work and what can I do to prepare?
What kind of documentation will be needed largely depends on the funding option that’s the most suitable one for your situation. For example, if you’re looking for property finance you might need a lot more documentation (like a RICS valuation or a development appraisal) than you would for a standard business loan. In other words, the criteria vary from one option to another.
However, there are a few things almost every lender will ask you to provide for an initial consultation, no matter what option you choose:
- Your business’s turnover and profit
- Your business bank statements from the last 3-6 months
- Your filed accounts
- Your overall trading history
- Your payment history (e.g. CCJs, late payments)
With all this information the underwriter will build a picture of your company. If your business has had a CCJ in the past, it’s good to be honest about it. In some cases you’ll get a chance to talk to the underwriter, so you’ll be able to explain your business’s history and how it came to the CCJ. Running a business is hard, and everyone can get stuck in a rut sometimes.
When you’re looking for business funding, make sure you have everything you need at hand. This way you could save the lender and yourself a lot of time, and the funds could be in your bank account even faster.
Credit rating and scores
While there are no standard factors that will decide whether you’ll get finance or not, there are a few rules of thumb you can bear in mind when applying for funding:
- The amount you can borrow is usually less than 25% of your annual turnover
- Your business needs to be profitable
- Your business has been trading for at least 24 months (for most products)
- No outstanding CCJs or late payments (depends on the finance provider)
- Your business is based in the UK
Another part of the assessment will be your credit score, which is an indicator of how reliable you are when it comes to finances. Whenever you borrow money or pay late, whether it’s a mortgage or an unpaid phone bill, credit reference agencies will record this information. Credit scores are usually divided in business and personal scores.
For example, if you have a business credit card and always pay back on time and in full, you may build up a good credit score. However, credit scores are just one part of the bigger picture, and they’re not the be all and end all for many lenders.
Personal guarantee and security
There are some funding options that require security. For example, business loan can be divided in unsecured and secured. If you choose a secured business loan, you’ll need to provide collateral to secure the loan against. This could be assets your firm holds such as business property, machinery, or vehicles.
Unsecured business loans on the other hand don’t require collateral. Instead, the lender will usually ask you to give a personal guarantee. This means that you’ll be personally liable if your business defaults on payments to the lender.
There’s a wide range of business funding options out there for different purposes and situations. While they may all have different eligibility criteria, there are a few factors that will always be part of the underwriting process. Hopefully this article has given you an overview of what’s part of an eligibility check, and how you can prepare for it.
Conrad Ford is founder and CEO of Funding Options, the online marketplace for businesses finance. Funding Options is helping the small walk tall. Funding Options helps businesses find the right funding for their situation — whether they want to grow, they’re fighting for survival, or simply need to pay a tax bill. @FundingOptions