Business Loan Requirements

Obtaining a business loan plays a crucial role in managing and advancing your company, be it for expanding to a fresh locale, gearing up for a busy period, or addressing unexpected repairs. Nevertheless, the prerequisites, interest rates, and repayment terms can differ based on the specific type of loan. To ensure your financing aligns with your objectives, it is imperative to comprehend and assess the various options available to you.

Unlike secured loans, where collateral is required, unsecured term loans rely solely on your personal and business creditworthiness to determine your eligibility, rates, and terms. If your credit history is unfavorable, you may encounter challenges in qualifying for such loans or may only secure an unsecured term loan with higher fees and interest rates.

What is a business loan?

A business loan refers to a financial arrangement where a company borrows funds to bolster its operations or facilitate its expansion. Typically, the business is required to submit an application and meet certain criteria to qualify for the loan, primarily based on its creditworthiness.

In the case of small business loans, the credit score of the owners may also impact eligibility, interest rates, and loan terms.

Types of Business Loans

There are various categories of business loans available for small business owners, offering flexibility based on their qualifications and specific intentions for utilizing the borrowed funds.

Unsecured Term Loans

Unsecured term loans provide the opportunity to borrow a specific amount of money and gradually repay the loan, inclusive of interest and fees, over a predetermined duration.

Typically, monthly installments with fixed amounts are utilized for loan repayment, although certain term loans may have a variable interest rate that can lead to fluctuations in your monthly payments.

Secured term loans

In addition to unsecured term loans, businesses have the option to provide collateral in order to obtain a secured term loan. By offering collateral that can be claimed by the lender in case of loan default, you may qualify for a larger loan or enjoy more favorable loan terms.

Depending on the specific requirements, there are secured term loans that allow you to utilize the funds as needed, while others mandate the funds be used to purchase the asset securing the loan.

Several common types of secured business term loans include:

Asset-secured business loans: Depending on the lender, you can use machinery, equipment, real estate, or other assets as collateral for a secured installment loan.

Equipment financing: Similar to obtaining an auto loan for purchasing a vehicle, equipment financing loans enable you to acquire specific pieces of equipment. These loans can be obtained from banks, credit unions, or directly from the manufacturer's financing department.

Commercial real estate financing: If you're in the process of purchasing commercial real estate, exploring commercial real estate financing options is essential. Once you own the property, you may also have the opportunity to utilize your equity to qualify for a commercial real estate equity loan or line of credit.

Invoice financing: Also known as accounts receivable financing, invoice financing allows you to leverage your unpaid invoices as collateral for a short-term loan or line of credit. Alternatively, invoice factoring provides an alternative financing approach where you sell your unpaid invoices to a factoring company instead of using them as collateral for a loan.

Additionally, certain business loans may require you to secure the loan with a blanket lien. This type of lien grants the lender the right to claim any of your business's assets, including accounts receivable and equipment, to settle an unpaid debt.

Business lines of credit

A business line of credit offers a versatile form of financing that provides the freedom to borrow funds without any obligation to do so. When you establish a line of credit, you are granted a maximum credit limit against which you can borrow through a single loan or a series of loans known as draws. Interest charges are applicable only when you borrow money, although there might be maintenance and financing fees associated with the account.

Lines of credit can be structured in various ways. A revolving line of credit operates similarly to a credit card, allowing you to borrow, repay the balance, and borrow again, as long as the total balance remains within the credit limit. On the other hand, non-revolving lines are less common and impose a cap on the overall borrowing amount. Once you reach this limit, you must continue making repayments and are unable to request additional draws.

To qualify for an SBA loan, specific eligibility criteria must be met. These criteria typically involve operating a for-profit business (with certain exceptions) within the US or its territories. The business owner is also required to invest time or capital and explore financing options with other lenders before considering an SBA loan.

SBA Loans

The US Small Business Administration (SBA) collaborates with lenders and offers partial guarantees on small business loans, effectively reducing the lender's risk. This partnership makes it more feasible for small business owners to secure financing at lower rates and with reduced fees.

There are various types of SBA loans available, which include:

SBA 7(a) loans: This loan program is widely utilized and encompasses different loan types, such as standard, small, and express loans. The loan limits and terms vary based on the specific loan type, but the standard 7(a) loan allows borrowing up to $5 million.

SBA 504 loans: These loans are long-term with a fixed interest rate. Generally, borrowers can access up to $5 million to acquire or enhance assets that contribute to business growth and job creation. The repayment terms for these loans are typically either 10 or 20 years.

SBA microloans: Small businesses can borrow up to $50,000 through this program, which provides flexibility for various purposes, including working capital and equipment purchase or repair. The interest rates for microloans typically range between 8% and 13%, with a repayment term of up to six years.

Requirements to get a business loan

The specific requirements for obtaining a business loan can vary based on the lender and the type of loan sought. Even with SBA lenders, who must adhere to the agency's guidelines, there can still be variations in lending criteria, rates, and terms. However, when applying for a business loan, you can expect the following factors to be part of the evaluation criteria:

Personal and business credit scores: As a small business owner, both your personal credit score and credit history can impact your eligibility and loan terms. Additionally, the credit scores and reports of your business, which are separate from your personal credit, are also significant factors.

Personal guarantee: Small business owners often need to provide a personal guarantee, which is a commitment to repay the debt in the event of missed payments by the business. Larger companies that qualify for loans solely based on their business's financials and creditworthiness may not require a personal guarantee.

Annual revenue: Some lenders establish minimum annual revenue requirements for borrowers, and you may be required to provide recent bank statements and tax returns for your business.

Years in business: The length of time your business has been operational can impact your eligibility. For example, certain lenders may require a minimum of two years of business history to qualify for an unsecured business loan or line of credit. However, there may be opportunities to secure a secured loan or alternative financing options before reaching that threshold.

Business industry and size: While these factors are beyond your control, the size of your business and the industry it operates in can influence a lender's decision. Some industries carry higher risks or require greater regulation, and certain lenders may prefer working with small or large businesses.

Business plan, financial statements, and loan proposal: It is common to be asked for a business plan, including financial statements of your business, as well as a loan proposal outlining how you intend to utilize the loan proceeds.

Remember that these are general considerations, and the specific requirements may vary between lenders and loan types.

Business loan requirements FAQ

What are the typical requirements for obtaining a business loan?

Securing a business loan usually necessitates having a minimum operating history of two years. Furthermore, meeting specific criteria for minimum revenue, personal credit, and business credit is essential. If you are seeking a secured loan, the assets you possess will also impact your eligibility.

What documentation is typically needed for a business loan?

When applying for a business loan, you will likely be required to provide copies of your business's tax returns, bank statements, financial statements, and business plan. Additionally, you may need to submit verification documents, such as articles of incorporation and lease agreements. Small business owners may also be asked to provide identity verification and proof of personal income.

Can I obtain a loan to start a business?

While some lenders do offer loans specifically designed for starting a business, many entrepreneurs often have to rely on their personal credit and financial resources to secure such loans. Alternatively, exploring alternative methods of raising capital, such as crowdfunding and securing financing from external investors in exchange for ownership equity, can be viable options.