Operating a business is no easy task. It takes a strong vision, the right team, and a continued thirst for growth & success. It is also true that all businesses need funds at some point to actualize their dreams. Knowing how to qualify for a small business loan can be helpful before you begin the application process.
Since there is a lot you should know about, we figured we should help you understand the general small business loan requirements. We’ll also go through general SBA loan requirements.
This small business loan qualifications list will provide you with all the information you need to apply for a small business loan.
Small Business Loan Requirements
When you apply for a loan, the primary concern of a lender is to determine your ability to repay the loan. To give the lender that assurance, you and your business are required to clear a few basic qualifications or requirements. Let us take a look at some general Small Business Loan Requirements and SBA Loan qualifications.
Please note that this is a general list, and specific qualifications might differ depending on the type of loan you want. So we advise you to read your loan documents carefully.
1. Personal Credit Score
Your personal credit score is quite important in the business loan application process. For many types of business loans, when you, as the owner of the business, sign the loan agreement, you are guaranteeing repayment of the loan along with interest.
Most lenders ask for your Social Security number and request permission to run a credit check for each owner with more than 20% ownership of the business. You can expect the personal credit score to be a factor in the loan application.
In the case of SBA Loans, the SBA does not set a minimum credit score requirement, but many lenders will require a personal credit score of at least 640.
2. Bank Statements, Ratings, and Credit history of Business
While examining your bank records, lenders look at seasonal fluctuations in income, debt to income ratio, and tax obligations. When you borrow from a bank, the bank assigns a rating. The rating is the total amount of borrowing capacity you have from that bank.
Your Business credit history can often be a factor in SBA loans as well. So make sure that before you apply for a small business loan, you check your business’ credit history and address any negative notations about your business.
Also, if you’re applying for an SBA loan, your business must be a ‘for-profit’ business. This is because the SBA only provides loans to companies that are considered ‘for-profit’.
3. Balance Sheet
Revenue is an essential factor in determining your business’ success. Lenders ascertain your revenue position through your Balance Sheet. They also analyze your assets, liabilities, and owner equity to assess the condition of your business.
The balance sheet includes assets, liabilities, and owner equity. The liabilities of businesses are subtracted from the assets of businesses. The calculated amount of owner equity is added to that number. It gives an estimated net worth of the business. This net worth must be reasonable in comparison to the loan amount sought.
4. Debt-to-Income Ratio
The debt-to-income ratio of your business helps the lender figure out how much money you are left with at the end of every month after all expenses are paid. It helps them figure out how much loan payment you can handle every month and how much you can borrow.
Lenders prefer to see financial statements that have been audited by a certified public accountant. You can have financials reviewed by a CPA, which is faster and cheaper, but some lenders require audited financials. Find out what the lender requires before applying.
5. Time in Business
The SBA does not set any specific time frames for most loans, but the lenders can set their own requirements. A lot of lenders prefer lending to enterprises that have been in business for at least two years, but that may vary from lender-to-lender.
For an SBA lump-sum loan, your business has to have been operational for two years. There are SBA loans that don’t have that requirement, such as many of the Line of Credit loans and the SBA microloans.
6. Type of Industry
For an SBA loan, businesses must meet the requirements according to the SBA’s definitions of small business. Those definitions vary by type of industry.
The SBA definition of small business is two-part: by the number of employees or by the average annual receipts (gross income).
Not all businesses are eligible for SBA funds because of the industry they’re in. There are several industries where the SBA will not guarantee a loan like businesses engaged in lending, life insurance services, primarily offer religious services and more.
If you don’t have business assets to secure a loan, many small business loans require you to put up your home, vehicle, property, or other personal assets as collateral.
Not all lenders require you to put up collateral to get a loan for your business. But for the lenders that do, you may have to list assets on your loan application.
Make sure you take the collateral requirement into consideration and carefully read the loan document to understand the lender’s policy about it.
8. Business Plan
Adding a business plan is rarely a requirement in business loans, but think of it as adding a good cover letter to your resume.
Lenders seldom ask to see a business plan from those seeking loans for their businesses. But including information about your business plan in your application may make your business stand out from others looking for a loan.
Include all the essential information about your business, what you do, and how you make money. Also, include how the loan fits into your business plan and how it’ll help your business.
How to Qualify for a Small Business Loan?
You should take the following steps if you want to improve your chances of getting approved for a small business loan or an SBA loan:
1. Build your Credit
If there is a scope of improvement in your personal or business credit scores, you must make efforts to build your credit. Review your business credit reports and spend time to address any mistakes or problems.
One easy way of building your business credit is by opening a couple of Business Credit Cards and paying your balance every month. This will start building your credit history and improve your chances of getting the loan approved.
2. Study the Lender’s Qualifications and Requirements
Lenders often prefer to lend to certain types of businesses. As long as they meet the minimum SBA qualifications and don’t discriminate, they can add their own requirements.
So, you must examine your specific lender’s qualifications and requirements thoroughly. It will ensure that you know all the terms of the loan before applying for it.
3. Organize Legal and Financial Documents
Your lender may want to see your profit and loss statement, tax returns (business and personal), and other financial records, so plan ahead by collecting them. Organize them in one place and check to make sure that all your documents are accurate and as per the lender’s guidelines.
4. Strong Business Plan
A healthy business plan shows the lenders that you have a goal and direction for your business. It shows them that you are driven and motivated to make this business a success.
A good business plan also gives lenders confidence in your ability to repay the loan.
So we’d suggest that you should not skip out on this step even if it isn’t a requirement. It’ll help your loan application stand out among others.
5. Document Collateral
Although, you can’t be turned down for an SBA loan just because you don’t have collateral. But, most SBA loans require you pledge collateral, if available. You must know what assets you have that can be used as collateral against the loan and research the market value. And you must know this before applying for the loan.
Following these steps before you apply for a small business loan or an SBA loan will improve your chances of getting the loan approved. So, you must plan your loan requirements well-in-advance and start working on the steps mentioned above. In this way, you can make sure that when you apply, you have the highest chances of getting the loan approved.
Popular SBA Loans and their Unique Qualifications
Here is an overview of the most popular SBA loan types and the unique qualifications for each, along with more detail on how the funding programs work.
SBA 7(a) Loans
SBA 7(a) loans are the most popular SBA loans and small business loans. You can use these loans for purposes like buying equipment, buying commercial real estate, purchasing a franchise, working capital, inventory, refinancing debt, and even starting a business.
These 7(a) loans have affordable rates and a low SBA guarantee fee for loans of $5 million or less. Repayment terms range from 10 years for short-term working capital to 25 years for commercial real estate.
You cannot use the loan proceeds for those industries restricted by the SBA. You also most likely require a credit score that falls into the Very Good or Excellent rating.
SBA 504 Loans
The SBA 504 loans are popular with borrowers looking to invest in real estate, construction, or equipment. There is no limit on the loan amount for these loans, but the maximum SBA debenture is $5 million.
So, loan requirements are much higher as compared to loans of lesser amounts. You will need a higher credit score, a good track record, as well as solid financials.
These loans must be repaid in 10 to 20 years, making them a suitable option for long-term financing. SBA lenders generally want to see a 10% down payment on the loan from the borrower. One final requirement for the SBA 504 loan is that any real estate purchased must be 51% owner-occupied.
SBA Microloans are excellent for very small for-profit businesses that require less than $50,000 as a loan. These loans are available for home businesses as well as only one specific type of non-profit organization, that is, daycares.
You’ll have up to six years to repay the loan. You may be required to engage in training or development programs that are available to your business as part of the microloan terms. The loan program is designed not just to give you money, but also to help you expand your business knowledge and grow your company. It helps position your business more competitively in the marketplace.
Small businesses can use SBA microloan funds for inventory, supplies, working capital, furniture, fixtures, machinery, or equipment. You cannot use these microloans to repay debt or to buy real estate.
As a small business owner, you need to stay updated with financing options. If you do this, should the day come that you want to grow your business, you’d already know the best financing solution for you.
Even if you don’t plan to apply for a small business loan program, it’s still a wise idea to work on building your credit and organizing your finances. It ensures that, if you decide to apply in the future, you have great chances of getting the best loan option approved quickly.
Did we miss out on some requirements for small business loans? Let us know in the comments below!
Need help figuring out which loan is right for your business? Get in touch with us today, and we’ll help you out.