How to Qualify for a Business Loan

Discovering and requesting a loan for your small business can be a laborious task. However, with advanced knowledge of the typical requirements that lenders seek in a business loan application, you can expedite the process and steer clear of potential exasperation. Presented below are seven key factors that lenders commonly consider when determining your eligibility for a loan. 

More established companies typically possess business credit scores ranging from 0 or 1 to 100 with credit bureaus such as Experian, Equifax, and Dun & Bradstreet. Building business credit involves establishing trade lines and maintaining a clean public record. 

Personal and Business Credit Scores: 

Securing a government-backed SBA loan or a traditional bank small-business loan often necessitates a strong personal credit score (typically 690 or higher) or an excellent business credit history. 

However, online lenders tend to be more flexible with credit scores, focusing instead on your business's cash flow and track record. Some online lenders may require a minimum personal credit score of 500. 

Personal credit scores reflect your ability to repay personal debts like credit cards, car loans, and mortgages. Small-business lenders conduct personal credit checks to assess your debt management skills. 

FICO scores, commonly used in lending decisions, range from 300 to 850, with higher scores being more favorable. Building your personal credit can be achieved by disputing any inaccuracies in your report and consistently paying bills on time and in full. 

Annual Revenue: 

Numerous lenders have a prerequisite that businesses must generate a minimum amount of monthly or annual revenue to be considered eligible. The specific cash flow requirements vary depending on the lender. For instance, OnDeck, an online lender, mandates a minimum annual revenue of $100,000 to qualify for its line of credit, while Bank of America sets its threshold at $250,000 for secured business loans. If your business has lower revenue, you may need to explore alternative financing options such as invoice factoring.

Years in Business: 

When seeking a business loan from a bank, it is typically necessary to demonstrate that your business has been operational for a minimum of two years. Online business loans generally have less stringent requirements but still typically require a minimum of six months in business to qualify.

Business Industry and Size: 

Each industry carries a distinct level of risk, with certain sectors like restaurants and beauty services considered high risk due to their potential for inconsistent revenue. Moreover, some industries are typically not supported by many lenders. These often include adult entertainment, drug dispensaries or products, gambling, and money service businesses. Specific requirements are attached to government-backed loans from the U.S. Small Business Administration (SBA). 

To qualify for SBA loans, you must fulfill additional criteria:

Providing this information instills confidence in lenders regarding your business, thereby enhancing the likelihood of loan approval.

Business Plan and Loan Proposal: 

Lenders are keen to understand how you intend to utilize the loan funds and assess your ability to repay. They may require a comprehensive business plan that outlines your business goals and the strategies you have in place to achieve them. 

In addition, some lenders may request a detailed business loan proposal, which specifically outlines the purpose of the loan and your repayment plans.

These documents should clearly demonstrate that your business has sufficient cash flow to cover both ongoing expenses and the new loan payments. 

Collateral or Personal Guarantee: 

When seeking a small-business loan, it is common for lenders to require collateral as a security measure. Business collateral, refers to assets such as equipment, real estate, or inventory that can be seized and sold by the lender in the event that you are unable to make loan payments. This serves as a way for lenders to recover their funds in case your business experiences financial difficulties.

For instance, SBA 7(a) loans above $25,000 typically necessitate collateral along with a personal guarantee from every owner holding a 20% or greater stake in the business. A personal guarantee for a business loan entails taking responsibility for repaying the outstanding amount from your personal assets if the business fails to do so.

While some lenders offer unsecured business loans that do not require physical collateral, they often still require a personal guarantee. Alternatively, lenders may also obtain a blanket lien on your business assets, which acts as another form of collateral, granting the lender the right to seize business assets (such as real estate, inventory, or equipment) to recover an unpaid loan.

It's important to note that each lender has its own set of rules and requirements. If you are unsure about what is expected, don't hesitate to ask questions and seek clarification.

Business and Financial Documentation: 

Traditional lenders, including banks, typically require a comprehensive array of paperwork when you apply for a small-business loan. The documentation necessary for a small-business loan encompasses both financial and legal aspects, and may include:

Online lenders may offer a streamlined application process with fewer document requirements and faster underwriting procedures.

Finding the Perfect Business Loan: 

The ideal business loan generally offers the lowest interest rates and most favorable terms. However, additional factors such as funding speed and your business's qualifications can play a role in determining the right loan option for you. 

Compare different small-business loans to identify the best fit for your specific business needs.

Frequently Asked Questions:

While the specific requirements for business loans vary among lenders, generally you will need good credit, strong financial standing, and an established business history to qualify. Traditional lenders tend to have more stringent requirements, whereas online lenders are often more flexible.

Banks typically require applicants to have good to excellent credit (a score of 690 or higher), solid financial stability, and a minimum of two years in business to qualify for a loan. Collateral and a personal guarantee are also commonly required by banks. Additionally, detailed paperwork is typically part of the application process, and some banks may require applicants to apply in person.

The specific documentation requirements can vary among lenders, but at a minimum, you will likely need to provide the following: