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. 

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:

• Your business must meet the SBA's definition of a "small" business, which varies depending on the industry. You can find the specific definition for your industry on the SBA's website.

• Your company must operate as a for-profit entity.

• Ineligible industries, such as real estate investing, gambling, or religious activities, are excluded from SBA loan eligibility.

• You must maintain a clean record with no defaults on government loans. Any history of late payments on federal student loans or government-backed mortgages, for example, will result in disqualification.

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:

• Personal and business income tax returns.

• Financial statements such as profit and loss statements, balance sheets, and income statements.

• Personal and business bank statements.

• A scanned copy of your driver's license.

• Commercial leases (if applicable).

• Business licenses.

• Articles of incorporation.

• Proof of collateral.

• A well-crafted business plan.

• Existing debt schedule, if applicable.

• Legal contracts and agreements.

• A resume that highlights relevant management or business experience.

• Financial projections, particularly if your operating history is limited.

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

Frequently Asked Questions:

1. How can you qualify for a business loan? 

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.

2. What do banks typically require for a small-business loan? 

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.

3. What documents are usually necessary for a business loan? 

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

• Business and personal bank statements

• Business and personal tax returns

• Financial statements such as balance sheets and income statements. It's worth noting that traditional lenders generally require more extensive documentation compared to online lenders.