Getting a small business loan can be overwhelming and sometimes frustrating. Understand what is required to qualify for a business loan to simplify the process of applying for and obtaining business financing.
Most small business financing is based on three main qualifications: revenue, credit, and time in business. However, depending on the lender and the type of funding, additional qualifications such as industry, collateral, business plan, finance and more may come into play.
Small business credit requirements
Three main factors are almost always considered in some way by small business lenders:
This is where lenders want to understand whether the company has sufficient cash flows to repay the loan or financing. Some lenders have annual minimum earnings (e.g. $120,000), while others require average monthly earnings for the past 3-6 months (e.g. $10,000 per month average).
To verify earnings, lenders often want to see company bank statements. Be prepared to either provide copies or link your bank account during the application process so the lender can access this information directly from your bank.
Some lenders, especially traditional lenders like banks, also require corporate tax returns and possibly even income tax returns. If tax returns are required, most lenders want to see copies from the last 2-3 years.
Annual accounts may also be required. Banks, including those that issue SBA loans guaranteed by the US Small Business Administration, may require recent financial statements, such as a balance sheet, an income statement, or a year-to-date income statement. Financial projections may also be required.
If your company invoices other companies, you may be eligible for invoice financing. In this case, you may need to submit a receivables aging report or an accounts receivable report. Your accounting professional can assist you in preparing this report if needed.
Here lenders want to understand how the applicant has dealt with debt in the past. Some lenders check personal credit reports or credit scores, some lenders check business credit reports, and some may check both. (Some lenders don’t check credit at all, but that’s the exception rather than the rule.)
Not all small business financing options require a good credit history, but many do have their personal credit checked by 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 more lenient requirements and may offer financing to those with credit scores in the low to mid-600s. Some types of financing are available to people with bad credit (generally under 620-650).
The initial credit check is often a gentle credit check that does not affect personal creditworthiness. However, if you decide to fill out the full loan application, there may be a tough credit check that can result in a drop of around 3-7 points.
Some lenders check the business loan. You can get credit reports from commercial credit bureaus such as Dun & Bradstreet, Equifax, or Experian. Often, they’re looking for red flags like excessive UCC filings, collection accounts, or judgments. In other cases, they will check the creditworthiness of companies.
3. Time in business
When you fill out a small business loan application, you will be asked when the business opened. That’s because most lenders have a minimum tenure in business. Some require at least two years in business, while others fund younger companies and even start-ups.
If you have a new business, your options are more limited and you may need to provide other information to convince the lender that you can repay the loan, assuming they are considering financing a startup. This may include a business plan or documentation (e.g. resumes) demonstrating experience in successfully starting other businesses or a track record of success in your industry.
If your company is incorporated (LLC, S Corp, or C Corp), you can use the incorporation date as the start date. Otherwise, you may need to use the date you received your business license or your Employer Identification Number (EIN).
The type of business you are in also matters. Companies are categorized using NAICS or SIC codes. These are government codes that specify the industry in which the company operates. Some types of businesses are hard to fund, period. Cannabis or gambling businesses are two examples.
Others may be considered risky by some lenders but perfectly acceptable to others. Examples are real estate, restaurants or retail stores. Some lenders provide financing to borrowers with this type of business, while others don’t touch them.
Collateral is something tangible that is pledged to secure the loan. It can include heavy equipment, real estate, private equity, inventory, or even future receivables. Not all business loans require collateral. In the case of SBA loans, the SBA requires collateral to be pledged if available, but lenders cannot refuse loan applications simply because the business owner has no collateral.
By its very nature, device financing involves collateral: you pledge the devices you are financing. Because the financing is backed by collateral, interest rates are often lower than an unsecured loan with no collateral.
The amount of funding you seek will also determine what you need in order to qualify. For example, a $1 million term loan requires significantly more documentation than a $10,000 microloan. The larger the loan, the more carefully it is checked.
In preparing for funding, it may be helpful to gather the following information. Not everything is needed, but having this information on hand can make the application easier and quicker.
- Current driver’s license or passport as proof of identity
- Personal tax returns
- Trade tax return for the last two years (if available)
- Business account statements for the last six months
- Trade license (if required)
- articles of incorporation
- Address Verification
- Bad check (for ACH or direct deposit)
- Franchise Agreement/UFOC (if applicable)
- Commercial rent (if your company rents real estate)
- Business plan (for bank loans or SBA loans)
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 history and income from all sources (not just business income). That means these cards may be available for small business owners with startups. Most credit cards require good credit, with minimum credit scores of at least 650 and often higher.
How can I qualify for a line of credit?
A business loan can be an excellent choice for flexible, short-term financing. Bank loans may have more stringent eligibility requirements and often require good to excellent credit. Online lenders may be more flexible, but the interest rate will usually be slightly higher.
How can I qualify for an SBA loan?
Most SBA loans are originated by lenders that are approved by the SBA. (The exception is disaster loans, including EIDL, which are issued directly by the US Small Business Administration.) There are over ten types of SBA loans and eligibility requirements vary, but generally you must have a for-profit small business to qualify qualify companies that do business in the US, have a good credit rating and have made an appropriate investment (equity injection) in the company.
Learn more about SBA loans and how to qualify here.
Is a personal guarantee required for a small business loan?
When a lender checks your personal credit, you’ll want to know if it’s because a personal guarantee is required. Providing a personal guarantee means the lender can attempt to collect from you personally if the company fails to repay 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 recognize what stands in the way of a loan approval.
If you have bad or bad credit, you should at least look at the following types of business loans:
If you have a new business, you should consider the following:
- business credit cards
- equipment financing
- Vendor or Vendor Financing
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