How to Qualify For A Small Business Loan in 5 Steps

How to qualify for a small business loan in 5 steps

While most loans require a good credit score, beyond that, qualification criteria can vary. That’s true both when comparing two loan types and two loans of the same type from different lenders. But you still have a shot: There are a few universal steps you can take to improve your chances no matter the loan type.

1. Build your credit report

Your personal and business credit scores are essential to a lender’s decision. These scores show lenders how responsible you are with their finances and how likely you are to repay the loan. Your personal score, typically the FICO score, can range from 300 to 850. Your business score, the FICO SBSS score, can range from 0 to 300. The higher your scores, the better you look to lenders.

While you can generally find financing unless your credit score is extremely low, pushing your score opens doors to bank loans and SBA loans. These funding routes are typically the borrower-friendliest. You can improve your credit scores by regularly repaying your debts – credit cards, student loans, and more. If your score is already good, you can open one or two more credit accounts, keep low balances on them, and repay them quickly. Over time, your credit score will likely rise.

You should also go over your credit reports and dispute any errors to make sure your rating isn’t getting needlessly dragged down. Roughly one in every three people finds errors in their reports. These errors can be make-or-break when applying for small business funding.

2. Research what the lender expects from you

Typically, lenders require potential borrowers to meet minimum criteria in several areas – not just credit score – to qualify for financing. You may need to be in business for a certain number of years or be a U.S. citizen. You might also need to put up collateral.

Before applying, you should look into what lenders might expect of you. This way, you only apply to loans that work best for your financial situation and business goals. The minimum requirements you’ll need to reach will differ depending on the type of loan you pursue.

Highly desirable financing options such as SBA loans will typically require minimum personal and business credit scores of around 680. They’ll also require at least two years of prior business experience. In some cases, $100,000 in annual revenue may be required. And in other cases, if you don’t meet certain criteria, you can remain eligible if you excel in some others.

Loans catering to bad credit ratings (generally 630 and below) tend to have less restrictive minimum requirements. As a result, their vetting process and payouts are often faster than with traditional lenders. However, loans for bad credit are usually lower-quality.

For example, two-to-five-year loan terms are possible, meaning you’ll have to make larger monthly repayments. Loan amounts might cap at $50,000, less than you can get elsewhere. Bad-credit APRs can be orders of magnitude larger than high-credit loans. If that’s all that you can get based on lender qualifications, then it’s better than nothing. But if you can meet higher lender expectations, go for it.

• Common lender requirements to qualify for a loan include a certain number of years in business, a minimum annual revenue, and U.S. citizenship.
• Loans with borrower-friendlier repayment terms, loan amounts, and interest rates typically have stricter requirements.
• If you can’t meet these requirements, other loans are available. However, they’ll likely cost you more.

3. Gather necessary documentation

Since traditional lenders have stringent vetting procedures, they often require a large amount of paperwork to approve your application. If you want an answer as quickly as possible, it’s essential to gather all the correct documents ahead of time. Typically, qualifying for a loan requires:

• Bank statements and credit reports. Bank statements allow a lender to look at how your business managed its finances within a recent period. Similarly, lenders will typically ask for a credit report to see how well you and your business have managed your bills and debts.
• Income statement. An income statement is one of the three main documents that help lenders understand your business’s financial performance. It reports your revenues and expenses over a certain period. It also indicates your net profit or loss during that period.
• Balance sheet. The second of the three key documents for analyzing business finances, your balance sheet is a snapshot of a point in time. It summarizes all your assets, liabilities, and shareholder equity alongside your business’s net worth.
• Cash flow statement. Your cash flow statement is the last of the three key documents. It tracks how cash and cash equivalents flow through the business. Lenders can use it to see how well you earn revenue to repay your debts.