By Alan Crystal, Forbes Councils

Why does qualifying for a small business loan have to be such a mystery?

According to a CB Insights study, cash flow issues are the second most common reason startups fail, accounting for 29% of failures. In many cases, access to capital would make a big difference. Yet the loan application process is notoriously opaque for small business owners. Research from the Federal Reserve Bank of New York shows the average small business owner spent 26 hours searching and applying for credit, contacted three financial institutions and submitted three credit applications. Despite this time-consuming work, only half of small-business applicants end up being approved for the loan amount they applied for.

Compounding this problem, many small-businesses owners may not know that they have a business credit score or how to access that information. Banks also don’t have to provide a reason for declining, and small businesses may not understand steps they can take to improve. What's more, small-business owners generally can’t afford a CFO able to help them with this process.

When small-businesses owners understand what factors into lenders’ decisions, they can work to improve their businesses and become more attractive in the eyes of lenders.

Knowing how banks evaluate the creditworthiness of a small business is a great place to start. There are seven key factors:

1. Business Debt Coverage

How much debt does the business currently carry, and can it afford to cover all of its existing debt obligations, as well as any new debt? To determine this, banks look at a company’s cash flow and its annual business debt payments.

2. Combined Business And Personal Debt Coverage

Business and personal finances are often interconnected. For this reason, banks usually take into account your personal debt obligations. What they want to know is: If the business is struggling and can’t afford to pay the debt, will the owner of the business be able to make the payments? This measure is calculated in much the same way as business debt coverage and takes into account business and personal cash flow, assets and combined debt obligations.

3. Business Credit

Did you know your business has its own credit score? There are a few different business credit scores that banks may use:

• FICO^{®<.sup> LiquidCredit® Small Business Scoring Service℠: Scores range from 0 to 300.}
• Dun and Bradstreet PAYDEX Score: Scores range from 1 to 100.
• The Intelliscore Plus℠ from Experian: Here, too, scores range from 1 to 100.

These scores are designed to quantify a business’ ability to repay a debt. Several factors influence your business credit score, including payment history, credit utilization ratio, company size and industry risk.

Note: “Hard pulls” can have a negative impact on the business and personal credit scores. Try to avoid applying for loans until you’re reasonably confident you’ll be approved, or check before you apply that the company does a “soft pull” that won’t impact your credit scores.

4. Personal Credit

Even if a business has a stellar credit score, banks want to understand the creditworthiness of the people running the business. Three credit agencies calculate a person’s credit score (known as FICO scores): Experian, Equifax and TransUnion. Though the models — and, thus, the scores — for each agency vary slightly, they’re based on the same criteria, which include payment history, amounts owed (including utilization), length of credit history, new credit and the types of credit in use.

5. Business Debt Usage

Banks want to know whether the amount of debt a business is carrying is appropriate for the business’ size and industry. Business debt usage compares outstanding business debt to either business revenue or assets.

6. Personal Debt Usage

Can you, as a business owner, access credit when you need it? Do you have available credit that you’re not currently using? Banks divide an owner’s outstanding debt balances by the total available revolving credit to calculate personal debt usage. In general, banks would like personal debt usage to be no more than 30%.

7. Business Revenue Trend

Banks want to know whether a business is currently growing. They assess the business revenue trend by calculating the average revenue growth over time. To limit the risk of default, banks look for revenue growth trends that match (or exceed) the industry average.

Note: Banks pull the revenues from tax returns. If businesses have previously been denied loans, it’s generally advisable that they reapply after a new tax return.

It’s important to remember that all seven of these measures will change over time. So, if your business was previously denied and your finances have improved, it may be worthwhile to reapply. Since banks rely on tax returns, the right time to reapply may be after you file your next return. One watch-out on this: Avoid initiating too many “hard pulls” on your credit, because this can hurt your score.

How can I keep track of all this, you ask? After all, most business owners are experts in their fields, not in finance. One alternative is to hire a financial adviser, but they can be expensive. The good news is that there are tools available today online today to help small businesses keep track of their finances and make the loan application simpler. So, if you can’t afford a “real” CFO yet, you might consider a digital online service instead. Digitizing your financial documents can also help, so when it’s time to apply for a loan, all the documentation is organized and searchable.

Ultimately, shedding light on the lending process will benefit all parties involved. Applicants will know whether they’re likely to be approved and won’t waste time if they’re not.

Transparency around the process is a good for lenders, too, as it will improve the quality of loan applications, increase approval rates and make the lending process more efficient and profitable.

Small businesses represent 99.7% of our country’s firms, according to the Small Business Administration. It’s time to empower them with valuable information about their finances, so they can reach their full potential and help our economy grow.