When it comes to qualifying for a small business loan, preparation is everything. Putting together an application to the to-do list is essential to making sure you get the funds you need to grow your business – so make sure you put some time aside to draw up a game plan. Whether you’re applying through a traditional bank or creditor, the SBA, or opt for alternative financing online, you should ensure you have a comprehensive knowledge of the lender’s requirements. Making sure you know the criteria you have to meet will save you a lot of time, stress, and mitigate any damage to your credit score. Below, we run you through five steps to get you ready to make your submission.
How to qualify for a small business loan in 5 steps
1. Familiarize yourself with the lender’s minimum requirements
Meeting the lender’s minimum requirements is essential to qualifying for a small business loan. Although some creditors will have some flexibility depending on your business performance, you can be confident you’ll have the best chance of approval if you meet or exceed their minimum requirements. Typically, a lender will specify a minimum credit score, annual or monthly revenue, and usually, they’ll require that you’ve been in business for a certain amount of time.
If you’re applying for a loan guaranteed by the SBA, you’ll have to meet some additional requirements. For example, your company needs to qualify as a small business according to their definition. Furthermore, you often need to have a strong personal credit score to complement the strong business performance. In addition, you can’t have any outstanding debt to the government or any past defaults – for instance, if you’ve missed a federal student loan payment you aren’t eligible for an SBA-backed loan. You’ll also need to make sure your sector is eligible – you can check by consulting this list.
Often, alternative online lenders will have less stringent requirements. Although they will still assess your eligibility based on your credit score, cash flow, and revenue, you won’t have to jump through as many hoops as you do with traditional creditors. For example, alternative lenders may be more lenient about previous bankruptcies or delinquent debt. However, it is important to remember that this leniency often comes with a price tag.
2. Build your business and personal credit score
Your credit score evaluates your ability to repay a personal debt like credit cards, car financing or a mortgage – and the higher it is, the better. Often, lenders will examine personal credit file as well as your business credit score as they want to see how you manage debt day-to-day. Your credit file, or FICO score, is based on five points:
• Payment history (35%)
• Total credit card and loan debt (30%)
• Length of credit history (15%)
• Types of credit currently in use (10%)
• Recent credit inquiries (10%)
Therefore, it is essential your credit file is in good order before applying for a small business loan. Paying your bills on time is essential to building a good score. However, you also need to proactive in ensuring there’s no mistakes in your file. Errors in your credit score can damage your ability to qualify for a small business loan – and they’re easily rectified. Contact a credit bureau like Experian, Equifax or TransUnion to get a copy of your personal file so you can check for any mistakes. You can do the same for your business credit score through Experian, Equifax, and Dun & Bradstreet.
If you want to qualify for a bank loan or SBA loan, it’s likely you’ll need excellent business and personal credit scores. Although there will be nuances between lenders, generally they’ll also check out your revenue, cash flow, and assess how established your business is. Generally speaking, online lenders will be a little more flexible when it comes to your credit scores and place more emphasis on business performance.
3. Prepare your documentation
Creditors usually ask for several financial and legal documents as part of your application process. Every lender will have individual requirements, but generally, these include:
• Personal and business tax returns
• Balance sheet and income statement
• Personal and business bank statements
• Commercial leases
• Business licenses
• Articles of incorporation
Preparing this documentation can be a time-consuming part of applying for a small business loan. Furthermore, studying this documentation can make the application process lengthy. Although this might be OK if you’re going for a long-term business loan, it can raise problems if you need financing fast. If you need working capital quick, often, alternative lenders are the answer. They provide a streamlined application process with less extensive documentation, which means they can provide faster financing. If your credit file is strong, sometimes their rates are comparable to that of a traditional bank.
4. Write a compelling business plan
An important part of demonstrating financial responsibility is a strong business plan. This document will show lenders how you intend to use the money and prove you have a repayment plan. Therefore, your business plan needs to demonstrate how you intend to increase revenue. The plan should include current and projected income, cash flow projections, expenses expectations, and loan costs. These calculations will give creditor confidence in your business acumen, boosting your chances of approval. Your business plan should include the following chapters:
• Executive summary
• Company overview
• Market analysis
• Organizational structure
• Description of your product or service offering
• Sales strategy
• Revenue projections
For a complete rundown on how to write your business plan, check out our handy 8-step business plan template.
5. Check if you need collateral
Some lenders may require you to provide collateral for your small business loan. Collateral is an asset, like real estate, inventory, or equipment, that can be repossessed by the lender should you fail to make your payments. In essence, collateral ensures the creditor can recover their investment should the business fail. For instance, the SBA requires “adequate” collateral for all loans, plus a personal guarantee of 20% or more of the business. It’s important to know that a personal guarantee will mean your personal score and personal assets, like your home, are at stake.
Some alternative lenders will not need collateral but might require a personal guarantee. Others might ask for blanket collateral over your business – which gives them the right to seize any business assets they see fit to recover an unpaid debt. Every lender with have their individual requirements, so do your research and make sure you’re 100% clear on the terms. However, there are uncollateralized loans out there – which is another reason to make sure your research is as thorough as possible before making your application.
Getting a small business loan: Preparation is everything
Applying for a small business loan is a major commitment. Not only do you have to be sure you can afford the repayments, but you also have to be fairly confident your application will be successful before you submit your paperwork. This is because failed applications can damage your chances of qualifying again in the future. Therefore, it is essential to thoroughly research your options before applying for a small business loan. Once you’ve identified a program that’s right for you, ensure you spend an appropriate amount of time preparing – even if you need cash fast. With proper preparation, you can save time, frustration, and ultimately, money.