Are you looking for a low-cost loan to grow your business? There’s a question every applicant should ask before they jump into the process: “Is my business loan ready?”
If your business is loan ready and financially healthy, you’ll save time and effort when going through the application process. Most importantly, financially healthy companies generally secure loans with lower rates and longer terms. Low cost funds are the best way to spark growth and savings.
We’ve identified seven factors banks look at when considering lending to a business. One important ratio is your Business Debt Usage. We’ll help you understand this important metric and give tips you can use to improve your score if necessary.
What is Business Debt Usage?
The debt your business owes is important, but more critical is how you manage revolving accounts like credit cards or lines of credit.
Your Business Debt Usage, also referred to as the debt-to-equity ratio, compares your total outstanding business debt to annual business revenue or total business assets.
How is Business Debt Usage Calculated?
NAV offers this example:
Let’s say you have a credit card with a $1000 credit limit and the balance that appears on your credit report is $500. You are using 50% of your available credit, and that means you have a 50% debt usage ratio. Now let’s say your balance is $200 instead. Your debt usage ratio is 20%.
Why Does Business Debt Usage Matter?
To qualify for a loan, your business debt needs to fit the lender’s criteria. Banks look at Business Debt Usage to assess if the amount of debt your business carries is appropriate for the size of your business and the industry you’re in.
What’s Your Business Debt Usage Goal?
Credit experts report that keeping your ratio below 30% will help you to maintain a good or excellent credit score.
How to Improve Your Business Debt Usage Ratio
These three tips can help you improve your score:
- Pay off your balance in full every month. Carrying a balance gives you less room to access credit. Your ongoing balance will be lower if you pay your balance in full.
- Request a credit line increase. Available credit is key. If your card has a low credit limit, consider asking for an increase. (And it goes without saying, don’t start charging!)
- Set up balance alerts. Use technology to your advantage. Sign up for text or email balance alerts. You’ll be able to determine where you stand.
For more information on banks lending criteria, review this blog post that summarizes the seven factors banks consider. We have in-depth posts about each if you’d like to take a deeper dive.
The SmartBiz team believes in 100% transparency and we’re here to help you get SBA loan ready if you’re not quite there. Not sure if you qualify for an SBA loan? Try the new SmartBiz Advisor™* online, educational tool to learn about how you can get your business SBA or bank loan ready before you apply – no cost involved. You can assess key criteria banks consider and where your business stands on each. Learn more about SmartBiz Advisor here.
*What you need to know: The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes only. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.