Business loan qualification: how to qualify for financing

Getting a loan for a small business can be overwhelming and at times frustrating. Find out what is required to qualify for a business loan to ease the process of applying for and obtaining business financing.

Most small business financing is based on three main qualifications: revenue, credit, and time spent in business. However, depending on the lender and type of financing, there may be additional qualifications including industry, collateral, business plan, finance, and more.

Small Business Loan Requirements

Three main factors are almost always somehow taken into account by small business lenders:

1. Revenue

Here, lenders want to understand if the company has enough cash flow to pay off the loan or financing. Some lenders have minimum annual revenue requirements (for example, $ 120,000), while others may require average monthly earnings over the last 3-6 months (for example, an average of $ 10,000 per month).

Lenders will often want to see company bank statements to verify earnings. Be prepared to provide a copy or link of your bank account during the application process so that the lender can access this information directly from your bank.

Some lenders, especially traditional lenders such as banks, will also require business tax returns and may even require personal income tax returns. When tax returns are required, most lenders want to see copies for the past 2-3 years.

Financial statements may also be required. Banks, including those that make SBA loans backed by the US Small Business Administration, may require up-to-date financial statements, such as their balance sheet, income statement, or annual income statement. Financial forecasts may also be required.

If your company invoices other companies, you may be eligible for invoice financing. In this case, you may need to provide a Receivables Aging Report or A / R Report. Your accounting officer can help you with this report if needed.

2. Credit

This is where lenders want to understand how the applicant has managed debt in the past. Some lenders check personal credit reports or credit scores, some lenders check the company’s credit reports, and some may check both. (Some lenders do not check credit at all, but this is the exception rather than the rule).

Personal credit

Not all small business financing options require good credit, but many have personal credit scores checked at one of the three major credit bureaus. Traditional lenders such as banks often require a minimum FICO score of 680-700. Online lenders may have lighter requirements and may offer financing to people with a low to medium credit rating of 600. Some types of financing are available to people with bad credit (usually below 620-650).

The Initial Credit Check is often a soft credit check that doesn’t affect your personal credit scores. However, if you choose to complete a full loan application, you may experience a hard credit check that could drop you by around 3-7 points.

Business loan

Some lenders will review a business loan. They can view credit reports from commercial credit bureaus such as Dun & Bradstreet, Equifax, or Experian. Many times, they look for red flags, such as over-filing to the UCC, debt collection bills, or convictions. Other times, they’ll check the company’s credit score.

3. Time in business

When completing your small business loan application, you will be asked when the business was opened. This is because most lenders have a minimum amount of time to run their business. Some require a minimum of two years in business, while others will provide funding to younger companies and even start-ups.

If you have a new business, your options will be more limited and you may have to provide other information to convince the lender that you will be able to repay the loan, provided they consider funding the startup. This may include a business plan or documentation (e.g. resumes) of experience in successfully starting other businesses or achievements in your industry.

If your company is registered (LLC, S Corp or C Corp), you can use the registration date as the start date. If not, you may need to provide the date on which you obtained a Business License or an Employer Identification Number (EIN).

Industry

The type of business you are in also matters. Firms 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 hard to finance, period. Cannabis or gambling companies are two examples.

Others may be considered risky by some lenders but perfectly acceptable to others. Examples are real estate, restaurants and retail stores. Some lenders will provide financing to borrowers in these types of businesses, while others will not touch them.

Safeguard

Collateral is something tangible required to secure the loan. It can include heavy equipment, real estate, home equity, inventory, and even future receivables. Not all business loans require collateral. For SBA loans, the SBA will require the collateral to be pledged, if available, but lenders cannot decline loan applications just because the business owner has no collateral.

Hardware financing by its very nature comes with a security: you pawn the hardware you finance. Since the financing is secured by collateral, the interest rates are often lower than that of an unsecured unsecured loan.

Amount of credit

The amount of funding you are looking for will also determine what you need to qualify. The millionth term loan will require far more documentation than, for example, a $ 10,000 microloan. The larger the loan, the greater the control will be.

Financing checklist

To prepare for funding, you may find it helpful to gather the following information. Not all of them will be required, but having this information at your fingertips can make the application easier and faster.

Personal information:

  • Current driving license or passport for ID
  • Personal tax returns

Business information:

  • Tax returns for companies from the last two years (if available)
  • Bank statements for the last six months for companies
  • Business license (if required)
  • Company statute
  • Address verification
  • Voided check (for ACH or direct deposit)
  • Franchise agreement / UFOC (if applicable)
  • Commercial leasing (if your company is renting the property)
  • Business plan (for a bank loan or SBA loan)

Frequently asked questions

How can I qualify for a business credit card?

Most small business credit cards base their decision on the owner’s personal credit score and income from all sources (not just the company’s income). This means that these cards may be available to small business startup owners. Most credit cards require good credit, with a minimum credit rating of at least 650 and often higher.

How can I qualify for a credit line?

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 or excellent credit. Online lenders can be more flexible, but the interest rate will usually be a bit higher.

How can I qualify for an SBA loan?

Most SBA loans are provided by SBA approved lenders. (The exception to this is disaster relief loans, including EIDL, which are provided directly by the US Small Business Administration.) There are more than ten types of SBA loans and eligibility standards vary, but overall you must have a small business geared towards qualifying. profit a company doing business in the USA, good credit and made a reasonable investment (capital injection) in the company.

Find out more about SBA loans and qualifications here.

Is a personal guarantee required for a small business loan?

If a lender checks your personal loan, you’ll want to understand if it’s because it requires a personal guarantee. When you give a personal guarantee, it means the lender can try to collect from you in person if the company defaults on the loan.

What are the easiest small business loans?

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 preventing your loan from being approved.

If you have weak or bad credit, you can at least check out the following types of business loans:

If you have a new business, you might consider:

  • Business credit cards
  • Equipment financing
  • Microloans
  • Vendor or vendor financing
  • Crowdfunding

This article was originally written on January 13, 2022.

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