Running a business isn’t easy – it takes a vision of success, the right people around you and a continuous willingness for growth. With that in mind, there is a point in every business’s stage when funding is necessary to shape all those dreams into reality—so knowing how and what qualifies you for a small business loan before your sign the application process can be beneficial.
Bear in mind that small business loan requirements can depend highly on a few factors, including time in business, yearly venture, and for some loan companies, the credit score is essential. A business loan can also vary quite substantially depending on the type of lender.
Your Personal and Business Credit Score
The higher your credit score, the better. Your credit score fluctuates between 300 or 850 and determines your eligibility to repay your personal; debts, such as a mortgage, credit card, and car loans.
The lending decisions are commonly based on five factors: your payment history, which is 53% of your credit score, 30% of the amounts owed on cards and other debts, the length of your credit 15%, and recent credit requests 10%. Lending companies will need to know your personal credit score in order to see how you manage debt.
What does that mean? Since your credit score is absolutely vital for obtaining a loan, paying your bills in time is one of the many things you can easily take care of to improve your credit score. However, even if you pay your bills on time, numerous credit report errors could be detrimental to your credit score. A study from the Federal Trade Commission has shown that one in 4 clients had identified harmful credit report errors. But only 4 of 5 clients filed a dispute to get their credit report revised.
Knowing Your Lender’s Minimum Qualification and Requirements
Your lender’s requirements and qualifications are essential, so knowing them will make you an excellent candidate. Some lending organizations may offer you flexibility if you’re failing in one area but over-performing in another, however, your best likelihood of getting approved lies in exceeding all of their minimums.
Normally, you’ll need to fulfill a minimum criterion related to your credit score, years in business, and annual income, and they generally have reservations when it comes to bankruptcies and other past delinquencies.
For example, if you’d need a loan supported by the U.S Small Business Administration, you have to meet other SBA loan requirements. Why? Your business has to meet such standards as they’re available only for small businesses. This also means you need to wander around with a strong personal credit and business income while being up-to-date with all government loans without defaults.
That said, if you have been late with your mortgage or a federal student loan, you have great chances to be disqualified. Your business should be profit-orientated otherwise you can’t fit on the SBS’s comprehensible business list, which includes financial businesses or life insurance companies. If you’ve already chosen an online lender, qualifying for them can be easier.
Although online lenders usually guarantee loans built on traditional factors like annual revenue, credit scores, and cash flows, they do not require the same stringent requirements as SBA loans. For some, some online lending companies may approve your application even without an established business or a strong credit score.
In-place Financial and Legal Documents
As you probably know, traditional lending businesses and banks typically ask for numerous financial and legal records during the application process. This list can include:
- Both personal and business income tax returns
- Business and personal bank reports
- Proof of your driver permit
- Business permits
- Commercial contracts
- Articles of incorporation
- A resume with relevant business and management experience
- Financial estimates if you a have reduced operating history
For many young entrepreneurs out there, these requirements can make getting a bank loan extremely time and energy-consuming. However, that may not be a problem if you’re on the market for some time and already experienced the process.
That said, if your plans required financial support right away, an online lender might be a better choice, because they can provide a faster online application process with faster underwriting and fewer documentation requirements.
A Well-Structured Business Plan
Your “lending reason” has to be very well supported and defined as every lender will have to know how you plan to use that money. They need to see that you’re honest and that you can repay. Some lending companies may require a stable business plan that will explain in detail the purpose of your loan and how exactly you expect to double your profits.
Bear in mind that your business plan should contain both projected and current financial and clearly summarize how your new business will have enough income to cover continuous business expenses plus the loan payments. Even with an Eq bank savings plus account, having a well-structured business plan and in-place financial documents will guarantee your lender that your business deserves financing through its success. This should not miss from your business plan:
- Logically, the type of service or product description
- Business description
- Management team
- Production analysis
- Operations and facilities plan
- Marketing, promotional and sales strategy
- SWOT analysis
Ability to Back the Loan
Some lending companies may require collateral in order to back the loan. Collateral refers to any type of equipment, inventory, real estate that can be easily sold by the lending company if you can’t repay your loan. This is a way many lending businesses succeed in recovering their money if your plan fails.
Small Business Administration may ask for “adequate” collateral for all their loans and a personal guarantee of 20% of the business.
Some lenders may also require collateral, however not all of them aim for a personal guarantee. Each lender has different requirements, so make sure to spend enough time asking around if you’re uncertain.
A business loan may come with a series of requirements, but that doesn’t mean it is an impossible dream. Taking your time to determine which lender conforms to your needs is all you have to do first.