When you are prepared, qualifying for a small business loan is quite easy. Whether you end up applying for an online loan or an SBA loan through your local bank, you need to familiarize yourself with lender requirements. Knowing whether you will meet lender criteria before you apply for a loan will prevent frustration:
Build Business and Personal Credit
Your personal credit score can range from 300 to 850, and it assesses your ability to pay back debts such as mortgages, credit cards, and car loans. Your credit score is based on 5 factors, which include payment history, how long you have had credit, kinds of credit in use, the amount you owe on credit cards and other debts, and latest credit inquiries.
A small business lender needs to see your personal credit score to qualify you for a loan. To improve your score, you should start paying your bills on time. Doing things such as getting pre- approved for a home loan will allow you to make better credit choices. If your business is more established, you need to check your business credit score, which ranges from zero to one hundred.
Know Lender’s Minimum Requirements
Meeting lender’s minimum requirements makes you a much stronger applicant. If you are over-performing in one area but not another, some lenders might offer flexibility. However, you stand a better chance of qualifying for a loan if you meet most or all lender requirements.
You need to meet criteria in areas such as years in business, credit scores, and annual revenue. Some lenders frown upon past delinquencies and recent bankruptcy, so you need to be careful with your credit. Are you looking for loans backed by the SBA? You need to meet the SBA loan requirements which include size standards.
You must also be current on all government loans; if you have been late in repaying federal student loans, you will not qualify for an SBA loan. Moreover, your business should be for-profit. Online lenders have less stringent requirements and you might have an easier time qualifying for online loans.
Gather Legal and Financial Documents
Traditional lenders such as banks will ask you for a wide range of legal and financial documents when you apply. The documents usually include the following:
– Commercial leases
– Business and personal income tax returns
– Driver’s license photo
– Income statement and balance sheet
– Articles of incorporation
– Resume that shows relevant business experience and management
All these requirements make the process of acquiring a loan time-consuming. However, that may not be a problem if you are looking for a long-term business loan. If you need money as quickly as possible, you should borrow from online lenders. They have a streamlined application process and ask for fewer documents, which mean faster underwriting.
If your credit scores and your business finances are excellent, some online lenders might give you rates comparable to those of bank loans
Develop a Strong Business Plan
Lenders need to know how you will spend the money, which means that you need to present them with a sturdy business plan. This document should include your projected and current financials as well as demonstrate that your business will generate enough cash flow to repay the loan.
Make sure that your business plan includes the following:
– Management team
– Operations and facilities plan
– Company description
You may have to provide collateral to back your loan. This refers to assets such as real estate or equipment that the lender can sell or seize if you fail to repay the loan. Collateral gives lenders a means of recovering their money.