Almost 75% of new companies are financed through the use of business loans, lines of credit, and credit cards. If you’re looking to qualify for a small business loan, it’s best to prepare ahead of time. Whether you choose a small business loan through the Small Business Administration or through a traditional lender, knowing lender eligibility requirements will make the application process much easier.
Keep reading to learn about what you’ll need in order to qualify for a small business loan.
Solid Credit History
One of the biggest factors that lenders look at when determining your risk as a borrower is your credit history. When applying for a small business loan, lenders will look at both your personal and business credit scores. In short, the higher your score, the more likely you are to be approved.
When lenders look at your credit score, most want to see numbers above 550. Lenders will also look at your credit history to evaluate your current debt load, payment history, and any recent credit inquiries. Before you apply for a small business loan, look over your credit report. Check for any discrepancies. If you notice a mistake on one of your reports, contact the agency to resolve the issue.
If your credit history and score could use a boost, there are actions you can take to improve your score including:
- Paying off debt
- Making more than the minimum payment
- Making payments on time
- Not opening new credit accounts
Having a solid credit history is a great start towards getting approved for a small business loan.
Create a Thorough Business Plan
Before approving a loan, lenders want a clear picture of how you plan to use the money, how it will benefit your company, and your ability to repay. To provide all of this information in one document, your best bet is to create a thorough business plan. For instance, if you run a digital marketing agency, your plan should detail why you need the loan, how the money will be used, and how the funds will increase profits and drive your company’s success.
The business plan should include current and projected financials so that you can show the lender that you have the necessary cash flow to pay for ongoing business expenses as well as loan payments. Showing income numbers on paper increase your chances of getting approved.
as they give the lender the confidence that you won’t default on the loan. Aside from projections, your business plan should also provide information about the company, a product/service description, the management team, and your marketing plan. Providing a SWOT (strengths, weaknesses, opportunities, threats) analysis may also be helpful. This shows the lender that you’ve taken the time to thoroughly plan out your business’ current and future state.
Most lenders require collateral to back a small business loan. Collateral is an asset that can be taken and sold by the lender if you fail to make loan payments. Collateral can include inventory, real estate, and business equipment. If you lack business collateral, personal collateral can also be used, such as your home or vehicle.
SBA loans not only require “adequate” collateral but a personal guarantee must also be provided by each business owner. This is a further safety net for lenders in the event that your business fails.
If you don’t have business collateral and don’t want to use personal assets as collateral, consider applying for a small business loan with an online lender. Most online lenders don’t require collateral but do require a personal guarantee as well as a potential blanket lien.
Gather Necessary Documents
Banks require all sorts of documentation during the application process. While not all of these documents may be required, it helps to have them on hand just in case the lender asks for them. Common documents include:
- Business and commercial licenses
- Personal and business income tax returns
- Bank statements
- Articles of incorporation
- Income statements
- Business plan
- Financial projections
As you can imagine, it not only takes a lot of time for you to gather these documents but it takes even longer for lenders to review and process them. Some small business loans can take weeks to process. If you need money faster, consider applying with an online lender. Online lenders have highly streamlined application processes and often have fewer documentation requirements. As an added benefit, these lenders tend to have comparable if not better loan rates and terms when compared to traditional banks.
Getting approved for a small business loan can make or break the future of your company. Once you decide to apply for business capital, the first step is to prepare and research. Clean up your credit history, improve your credit score, draft a solid business plan and collect all necessary documentation. Have you ever applied for a small business loan in the past? What steps would you take to simplify your application process in the future? Leave us a comment in the section below.