Getting a small business loan can be overwhelming and sometimes frustrating. Understand what is required to qualify for a business loan to facilitate the process of applying for and obtaining business financing.
Most small business financing is based on three main criteria: income, credit, and time in business. Depending on the lender and type of financing, however, there may be additional qualifications including industry, collateral, business plan, financials and more.
Small Business Loan Requirements
Three main factors are almost always considered in one way or another by small business lenders:
Here, lenders want to understand if the business has sufficient cash to repay the loan or financing. Some lenders have minimum annual income requirements (eg $120,000) while others may require average monthly income for the past 3-6 months (eg $10,000 per month on average).
To verify income, lenders will often want to see business bank statements. Be prepared to provide copies or link your bank account during the application process so the lender can access this information directly from your bank.
Some lenders, especially traditional lenders like banks, will also require business tax returns and may even require personal tax returns. When tax returns are required, most lenders want to see copies for the last 2-3 years.
Financial statements may also be required. Banks, including those that provide SBA loans backed by the U.S. Small Business Administration, may require up-to-date financial statements, such as a balance sheet, income statement, or profit and loss statement since inception of the year. Financial projections may also be required.
If your business invoices other businesses, you may be eligible for invoice financing. In this case, you may need to provide an Aged Accounts Receivable Report or an Accounts Receivable Report. Your accounting professional can help you run this report if needed.
Here, lenders want to understand how the applicant has handled debt in the past. Some lenders check personal credit reports or credit scores, some lenders check business credit reports, and some may check both. (Some lenders don’t check credit at all, but that’s the exception rather than the rule.)
Not all small business financing options require good credit, but many check personal credit scores with one of the three major credit bureaus. Traditional lenders such as banks often require a minimum FICO score of 680 to 700. Online lenders may have more lenient requirements and may offer financing to those with credit scores between 600 and 600. Certain types of financing are available for those with bad credit (usually below 620-650).
The initial credit check is often a soft credit check, which does not affect personal credit scores. However, if you decide to complete the full loan application, there may be a rigorous credit check which may result in a drop of around 3-7 points.
Some lenders will check the company’s credit. They may review credit reports from commercial credit bureaus such as Dun & Bradstreet, Equifax or Experian. Often they look for red flags such as excessive UCC deposits, collection accounts, or judgments. Other times they will check the companies’ credit ratings.
3. Time spent in business
When you complete a small business loan application, you will be asked when the business opened. This is because most lenders have a minimum time in trading requirement. Some require a minimum of two years in business, while others will provide funding for start-ups, or even start-ups.
If you have a new business, your options will be more limited and you may need to provide other information to convince the lender that you will be able to repay the loan, provided they are considering funding a startup. This can include a business plan or documentation (like resumes) confirming successful experience starting other businesses, or a track record in your industry.
If your business is incorporated (LLC, S Corp or C Corp), you can use the date of incorporation as the start date. Otherwise, you may need to use the date you obtained your business license or obtained your Employer Identification Number (EIN).
The type of company you work for is also important. Businesses are classified using NAICS or SIC codes. These are government codes that indicate the industry in which the company operates. Some types of businesses are difficult to finance, period. Cannabis or gambling companies are two examples.
Others may be considered risky by some lenders but perfectly acceptable to others. Real estate, restaurants or retail businesses are examples. Some lenders will provide financing to borrowers with these types of businesses, while others will not.
Collateral is something tangible pledged to secure the loan. It can be heavy equipment, real estate, personal home equity, inventory, or even future receivables. Not all business loans require collateral. In the case of SBA loans, the SBA will require collateral to be pledged if available, but lenders cannot reject loan applications simply because the business owner does not have collateral.
Equipment financing by nature involves collateral: you pledge the equipment you are financing. Since the financing is secured by collateral, the interest rates are often lower than for an unsecured loan without collateral.
Amount of the loan
The amount of funding you seek will also determine what you need to qualify. A $1 million term loan will require a lot more documentation than a $10,000 microloan, for example. The larger the loan, the more control there will be.
To prepare for funding, it may be helpful to gather the following information. Not everything will be necessary, but having this information at your fingertips can make the application easier and faster.
- Valid driver’s license or passport as proof of identity
- Personal tax returns
- Tax returns for the last two years (if available)
- Last six months of company bank statements
- Commercial license (if required)
- Articles of incorporation
- Address Verification
- Void check (for ACH or direct deposit)
- Franchise Agreement/UFOC (if applicable)
- Commercial lease (if your business leases property)
- Business plan (for bank loan or SBA loan)
How can I benefit from a business credit card?
Most small business credit cards base their decision on the owner’s personal credit scores and income from all sources (not just business income). This means that these cards may be available to small business owners with startups. Most credit cards require good credit, with minimum credit scores of at least 650 and often higher.
How do I qualify for a line of credit?
A business line of credit can be a great choice for flexible short-term financing. Bank lines of credit may have stricter eligibility criteria and will often require good to excellent credit. Online lenders can be more flexible, but the interest rate will usually be a bit higher.
How do I qualify for an SBA loan?
Most SBA loans are made by SBA-approved lenders. (The exception is disaster loans, including EIDL, which are made directly by the U.S. Small Business Administration.) There are more than ten types of SBA loans and eligibility criteria vary, but generally, to be eligible, you must have a for-profit small business. a company doing business in the United States, good credit and a reasonable investment (capital injection) in the company.
Learn more about SBA loans and how to qualify here.
Is a personal guarantee required for a small business loan?
If a lender checks your personal credit, you’ll want to understand if it’s because they require a personal guarantee. When you give a personal guarantee, it means that the lender can try to recover from you personally if the company does not repay the loan.
What are the easiest small business loans to get?
If you have bad or bad credit, you might want to at least check out the following types of business loans:
If you have a new business, you might want to consider:
- Business credit cards
- Equipment financing
- Supplier or vendor financing
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