Getting a small business loan can be overwhelming and frustrating at times. 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 spent in business. Depending on the lender and the type of financing, however, there may be additional qualifications including industry, guarantees, business plan, financial data 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 know if the business has enough 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 last 3 to 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 that the lender can access this information directly from your bank.
Some lenders, especially traditional lenders like banks, will also require business income tax returns and may even require personal income tax returns. When tax returns are required, most lenders want to see copies of the past 2-3 years.
Financial statements may also be required. Banks, including those that provide SBA loans guaranteed by the US Small Business Administration, may require up-to-date financial statements, such as a balance sheet, income statement, or income statement from the beginning 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 might need to provide an Accounts Receivable Aged Report or A / R report. Your accounting professional can help you run this report if necessary.
Here, the lenders want to understand how the applicant has handled his debt in the past. Some lenders check personal credit reports or credit scores, some lenders check business credit reports, and some may check both. (A few lenders don’t check credit at all, but this is the exception rather than the rule.)
Not all small business financing options require good credit, but many check personal credit scores from 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 can offer financing to those with credit scores between 600 and 600. Some types of financing is 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 fill out the entire loan application, there may be a serious credit check which can lead to a drop of around 3-7 points.
Some lenders will check trade credit. They can examine credit reports from commercial credit bureaus such as Dun & Bradstreet, Equifax, or Experian. Many times they look for red flags like excessive UCC deposits, collection accounts or judgments. Other times, they will check the credit scores of businesses.
3. Time spent in business
When you complete a small business loan application, you will be asked when the business first opened. This is because most of the lenders have a minimum time requirement in the business. Some require a minimum of two years in business, while others will provide funding to younger businesses and 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 documents (such as resumes) confirming successful experience in 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 business you work in also matters. Businesses are categorized using NAICS or SIC codes. These are government codes that indicate the industry in which the company operates. Certain types of businesses are difficult to finance, period. Two examples are cannabis or gambling businesses.
Others may be viewed as risky by some lenders but perfectly acceptable to others. Examples are real estate, restaurants or retail stores. Some lenders will provide financing to borrowers of these types of businesses, while others will not.
The collateral is something tangible pledged to secure the loan. This can include 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 the pledging of collateral if available, but lenders cannot reject loan applications simply because the business owner does not have collateral.
The financing of equipment by nature implies a pledge: you pledge the equipment that you finance. Since the financing is backed by collateral, interest rates are often lower than an unsecured unsecured loan.
Amount of the loan
The amount of funding you seek will also determine what you need to qualify. A million dollar term loan will require a lot more documentation than a $ 10,000 microcredit, for example. The larger the loan, the more scrutiny there will be.
To prepare for funding, it may be helpful to gather the following information. It won’t all be necessary, but having this information handy can make the application easier and faster.
- Current driver’s license or passport for proof of identity
- Personal tax declarations
- Income tax returns for the last two years (if available)
- Corporate bank statements for the past six months
- Commercial license (if necessary)
- Articles of incorporation
- Address verification
- Canceled check (for ACH or direct deposit)
- Franchise contract / UFOC (if applicable)
- Commercial lease (if your business rents a property)
- Business plan (for bank loans or SBA loans)
How do I qualify for 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 for small business start-up owners. 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 an excellent choice for flexible short-term financing. Bank lines of credit may have more stringent eligibility requirements 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 US Small Business Administration.) There are more than ten types of SBA loans and eligibility standards vary, but generally for To be eligible, you must have a small, for-profit business doing business in the United States, have good credit, and have made a reasonable investment (equity injection) in the business.
Learn more about SBA loans and how to qualify here.
Is Personal Guarantee Required For A Small Business Loan?
If a lender is checking your personal credit, you’ll want to understand if it’s because they require personal collateral. When you give a personal guarantee, it means that the lender can try to collect you personally if the company does not repay the loan.
What are the easiest small business loans to get?
Online loans are generally easier to obtain than bank loans or SBA loans. Decisions can be made very quickly. In addition, it is important to identify what is hindering the approval of the loan.
If you have bad credit or bad credit, you might want to at least check out the following types of business loans:
If you have a new business, you may want to consider:
- Business credit cards
- Equipment financing
- Supplier or vendor financing
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