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Small Business Loan Requirements & Qualifications

All businesses need additional capital at one time or another, whether for growth or to cover an unexpected shortfall. A business loan can be a great way to obtain this capital. There are many different options to consider when your business needs some extra cash, so it’s important not to rush into anything before exploring your options.

All these options have different requirements of the business, and of you as the owner. Typically, lenders will be looking at your credit score, revenue, your industry, time in business, and what collateral you have to offer, but this will vary depending on the type and size of small business loan you are looking to get.

SBA Loan Requirements

Small Business Administration (SBA) loans are those that are backed by the government to give out large loan amounts of up to $20 million, although they are particularly hard to qualify for because of this. SBA loan qualifications vary depending on the exact SBA loan you choose, as well as your credit score and how long you have been in business.

For more detailed information on SBA Loan Requirements, click here.

Small Business Loan Requirements/Qualifications

Requirements vary depending on the loan type and lender, but generally, small business loan requirements include these five factors:

Personal Credit Score

Your personal credit score, as well as any other owners or stakeholders within your business, is one of the first things looked at by potential lenders. Having a good credit score will show lenders that you are responsible enough to make loan repayments on time, so you will be seen as less of a risk for them to lend to you.

It is good practice to build up your credit score as much as possible so that you will know you are likely to be approved before you apply, and you will be able to obtain lower interest rates. It is best to aim for a credit score of at least 600, 700 is ideal, though some lenders will give you approval with a lower score.

Annual Revenue

Having a healthy cash flow shows that your business will be able to make loan repayments without any problem. It is also a good indicator that your business is profitable, and you are, therefore, a good candidate for a business loan.

Many lenders will need your business to have annual revenue of $100,000 or more (though some consider $50,000 or more), or an income of 1.25 times more than regular operating expenses.

Current Debt

Your current debt will also be considered by lenders. If your debt-to-income ratio is more than 50%, it is much less likely that you will get approval for a business loan.

Time in Business

Many large lenders require at least two years in business. This makes it much more difficult for startups to find the funding they need.

However, you can find online lenders that will accept businesses that are only a year old, or occasionally even newer, if you have a solid business plan that demonstrates high potential income. Other forms of financing, such as equipment loans and invoice financing, are also options for startups.

Collateral

Although you can find a few business loans that require no kind of guarantee, most small business loan requirements include the need for collateral and/or the signing of a personal guarantee.

Collateral includes assets such as real estate, equipment, inventory, or other business assets, that can be seized and liquidated by the lender if you are unable to make your repayments for any reason. Essentially, it is a guarantee that the lender will be able to get their money back if your business were to fail.

If you don’t have enough collateral to meet requirements, or you think it is too much of a risk to put your personal assets on the line with a personal guarantee, you should look into applying for an unsecured business loan, which will be more expensive with higher interest rates, but you won’t need to put up any collateral.

Industry

Lenders will also look at the industry category your business falls into, to determine risk.

Commercial Loan Requirements

Commercial loans can be either secured or unsecured. Secured commercial loans are generally cheaper as the lender is at a lower risk because they can simply seize and liquidate your assets if you are unable to make repayments. Unsecured commercial loans are good if you’re unable to get together the assets you’d need for a secured loan, but they will come at a higher price.

See Also: How to Get a Commercial Loan

Business Microloan Requirements

If you only need a small amount of funding, ranging from $500 to $50,000, you could look into getting a business microloan. It should be noted that these loans are typically only available for new businesses set up by people from low-income communities or underserved groups, such as women and minorities, that are unable to qualify for other methods of funding.

Each microlender will have different requirements that you must meet, but they are typically very similar to small business loan qualifications listed above:

  • Time in business
  • Type of business
  • Revenue
  • Personal credit score

As with any business loan, it is a good idea to clean up your credit report to determine if you are likely to qualify, although you can often still qualify with a low credit score, and microloans are a great way to build up your credit score to get a better funding option in the future.

You also need to create a strong business plan to be considered for a business microloan. This needs to outline where your income comes from, the location of your business, your target market, and your business goals detailing how you will achieve them.

Documents Required for a Business Loan

The documents you will need to present when you apply for a business loan may vary by lender, but the most commonly requested ones are:

  • Bank statements – both business and personal
  • Tax returns – both business and personal
  • Business registration
  • Balance sheets
  • Profit and loss statements
  • Photo identification
  • Collateral documents
  • Strong, detailed business plan with financial projections
  • Personal financial statements

Business loan requirements vary depending on the type of loan and the lender, but ensuring that you meet the qualifications listed above is a great place to start when you start thinking about applying for a business loan.

When you’re ready to compare loans, we’re here to help. You should always compare loans rather than going direct to ensure you’re getting the best rates and the highest likelihood of acceptance. It’s important to remember that while you’re hoping to get your funding, it’s also something you’re going to be paying back for months, if not years, so you need to get the best deal. Click here to get started.

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