When applying for a small business loan or a business loan consolidation from traditional lenders, most borrowers already know that having outstanding debt can impact how their potential lenders might react. What borrowers might not realize is how their specific kind of debt can have its own effect on whether or not a lender will approve their loan request.
There is more to a borrower than just a credit score. Your BVI (Borrower Viability Index) shows lenders the whole picture—who you are as a business and as a borrower. Before you submit any information to a bank or alternative lender, find out how likely you are to be approved.
Usually when small business owners seek a loan, they don’t have a business history substantial enough to enable a lender to assess the likelihood of the loan being paid back. To get a better sense of the borrower, lenders typically dig into the borrower’s personal credit record to learn how that business owner handles debt.
Here’s some insight on how the kind of debt you have can affect your chances of scoring a small business loan from an alternative lender:
MORTGAGES: For most homeowners, a mortgage is possibly their largest monthly debt payment. Many lenders examine small business owners’ home mortgage to assess how regularly they make their payments, as well as their debt-to-service ratio. For example, if your mortgage payments are very high compared to your income, the lop-sided ratio might scare lenders away because they’ll think that you couldn’t take on an additional loan.
If the lender wants to secure collateral, your mortgage payments compared to your equity might also impact your loan approval, because it’s likely that if you have a high payment and a low amount of equity, the lender may assume you might not have enough room for a second mortgage to secure the business loan.
STUDENT LOANS: According to a recent study called “The Impact of Student Loan Debt on Small Business Formation”, student loan debt might have more of an impact on securing a business loan than some owners might realize. Some small business owners are so heavily buried under their student loan debt that lenders don’t want to lend them money. For these owners who want to borrow, alternative lending options would be a better bet.
PERSONAL LOANS: If you have taken out a personal loan, such as a signature loan or a secured car loan, lenders often want to see how well you’ve paid them back. For example, are you making your debt payments in full and on time? Lenders use your credit history to predict your ability to repay a new loan.
CREDIT CARD/CREDIT LINE: Unlike most other loans that involve set monthly payments and a foreseeable end, credit cards and lines of credit are revolving credit with a set limit but no time frame. Lenders might look at the amount of credit you have available on all your outstanding credit cards and credit lines, and determine how much the total would be if you maxed out every one. Then they would compare that sum to your income, and figure out how their loan would affect your ability to keep up with all your monthly payments.
BUSINESS LOAN: If you’ve already taken out a business loan and paid it all back, you could improve your chances of getting a new loan. You might even receive better terms than you did on your first loan! Additionally, having a business loan that you’re currently paying back might help your chances of obtaining a new loan, especially if you combine them into debt consolidation.
If your outstanding debt discourages you from obtaining a traditional small business loan, then you should definitely consider alternative online lenders because they can offer you some great options.