How to qualify for a small business loan
Build individual and company credit scores
Your personal credit score ranges from 300 to 850 (the higher, the stronger) and evaluates your capacity to pay back your outstanding debts, such as credit cards, outstanding loans, and other business expenses.
The FICO score, generally used during lending decisions, is based on the following considerations: your payment history (35% of your score), amounts owed on credit cards and other debts (30%), how long you’ve had credit (15%), types of credit in use (10%) and recent credit inquiries (10 percent ). Small business lenders will require a personal credit score for loan applications because they want to see how you maintain the debt.
Making your payment on time is critical to your credit report. But even though you pay your bills like clockwork, a credit report mistake might affect your ratings. According to a 2012 survey by the Federal Trade Commission, one in four customers reported adverse credit report mistakes. However, the analysis showed that 4 out of 5 customers who lodged a lawsuit had their credit score changed. A follow-up analysis by the FTC showed that % of these users saw a jump in their credit score because they had corrected mistakes.
You’ll need to have an outstanding company credit score and a decent personal credit score to apply for an SBA loan or a regular loan from a bank, based on the particular lender and business conditions, such as the income, cash flow, and time in business. Since online lenders are more lenient when it comes to your credit score, they often recognize the cash flow and track record of your company.
Study the lender’s minimum credentials and specifications.
To apply for a loan, fulfilling the lender’s minimum qualifications and criteria is necessary. Some lenders may have some flexibility in securing the loan, but the best chance of getting accepted is to exceed all of the minimums.
Loan borrowers are usually expected to have adequate credit ratings, sales, and/or amount of years of operation. The lenders usually frown upon bankruptcies and other previous delinquencies.
Whether you’re looking for loans that take place inside the U.S. Small Business Administration, you have to meet certain criteria to be eligible for funding. Your company must follow the SBA’s size requirements and these loans are only eligible for small companies. Borrowers must have good personal and company profits and must remain present on all government loans, with no previous defaults. If you’ve fallen behind on a federal student loan or a government-backed lease, you are excluded from admission into the scheme.
Your business must run as a for-profit corporation and you can’t be on the SBA’s disqualified businesses list, which covers life insurance firms, financial businesses such as banks, and real estate investment.
Collect both financial and legal records.
Banks and other conventional lenders will need several different financial records and legal details. The list includes:
- Sales and income tax reports.
- A balance sheet and financial reporting.
- Family and company bank accounts.
- A snapshot of your identity.
- Commercial rentals.
- Government permits.
- Foundations of incorporation.
- A resume highlighting specific expertise in management or business.
- Financial forecasts if you have an ongoing pattern of achieving results.
These conditions will find having a bank loan difficult. That would not be a problem if the loan is for a long-term mobile electronics company.
And if you need money quicker, then online lenders could be more suited, as they have a simpler online application process with fewer criteria and faster underwriting. If you have a good credit history and sound business finances, those lenders can provide you with interest rates comparable to those for bank loans.
Build a solid strategic strategy.
Lenders will want to ensure that you will have the means to repay the loan, and they will want to see if you plan to spend the money. They will look for a good strategic strategy and an overview of the project and the intended rise in revenues.
The proposal should specifically show that the corporation would have the adequate cash flow to fund current business costs and new debt payments. This will help the bank build your reputation, increasing your loan chances. Your strategy must include:
- Company summary.
- Item and/or service overview.
- Admin workers.
- Company review.
- Their infrastructure and operations schedules.
- Marketing, promotions, and distribution strategies.
- A SWOT review (strengths, weaknesses, opportunities, threats)
If you apply for the loan, you must promise equity as a guarantee. Collateral is a commodity, such as land, machinery, or inventory which can be taken if you are unable to make payments. Corporate loans provide a means for lenders to collect funds if a company fails.
SBA loans require sufficient collateral on all loans and require all owners to directly guarantee 20% of the company. A personal assurance places your credit and personal belongings at risk.
Any lenders need collateral but can get a guarantor if desired. Some can even take a blanket lien on your company properties. This means they can take some real estate, property, and/or machinery to recoup any outstanding debts. Each lender has various criteria, so it’s necessary to ask questions if you are confused about what each lender needs.
If you do not have leverage or the collateral value is too low, unsecured business loans might be a more viable alternative.
You’ll need to access working capital to grow your company, but you’ll also need to furnish office space, supplies, facilities, marketing, and more. Although most new companies start with a modest investment of $10,000 or less, not everyone who wants to start a company has access to this number. This is where company loans can be accessed.
Unlike other positive stuff, business lend are not handed out fast. Unlike personal loans, student loans carry more liability and are more stringent about whether they’ll accept. When seeking a business loan, many business owners are unsure whether they will apply for a loan. The internet is saturated with a vast volume of data on small business loan criteria.
To break through the chaos and help you obtain more funding, we’ve distilled the loan eligibility requirements so you don’t have to go through the application process.
After completing a strategic strategy with financial forecasts and maintaining fiscal discipline, the next move is gaining financial backing from investors. (Success requires attention to detail.)
Once lenders evaluate an applicant, they assess six separate characteristics of the borrower—and they review against minimum criteria. You must have a decent credit record and an annual salary of at least $20,000 (if you’re fresh in the business, some lenders would go as low as $10,000). While lenders have varying funding conditions, we’ve identified the lenders that can better meet your specific needs.
Balance-based lending helps you to make a minimum charge when charging interest for only the amount you currently spend.
Equipment finance lets you pay for items like machinery, supplies, and other equipment your company needs to operate efficiently.
Invoice factoring loans reimburse you upfront what’s due in your bank statement receivable. No more waiting for late to pay customers—you are billed the payment sum (minus a fee), and you collect from your clients’ accounts so that you can go back to business as normal.
Merchant cash loans pay you a certain amount of money in return for a share of the net potential income.
Peer-to-peer lending entails a comparatively recent online-only network in which you can borrow a fixed amount from a group of lenders.
U.S. government-sponsored loans are endorsed by SBA. Small Business Management, issuing loans at low-interest rates to achieve reliability.
Term loans offer an instant lump amount of cash in return for a high-interest rate.
Unsecured loans are loans that don’t need any form of collateral. Most outlets for business credit usually are unsecured loans.
Working Capital loans generate daily cash flow and help you to pay staff and manage other urgent needs.
A notice on term lengths: short-term loans supply you with the money to invest on the promise that you’ll pay the money back, and that it’ll be within a year.
Long-term funding is best for long-term, company expansion; while short-term loans will hold you over through a seasonal dip in revenue or help you buy a critical piece of machinery, long-term financing options have a greater chunk of capital for investment and growth.
There is no one-size-fits-all solution when it comes to applying for business loans. If you may believe you need a great credit score and high annual revenue to receive the best small-business loan, most lenders take a lot of considerations into consideration—if you’re deficient in one area, like a poor credit score, you might be able to secure a loan by the strength of other areas, like a lower level of existing debt.
With careful planning and wise financial choices, you will improve your odds of getting a fast business loan.
Contact us today to see what your options are and how we can help!