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With enough preparation, qualifying for a small business loan can be easier than you might imagine. Fortunately, business owners are having an easier time being approved for a low-interest SBA loan in less time than they had previously.
As one of the most reliable and low-risk methods of securing financing for small businesses, SBA loans are an invaluable asset to any entrepreneur. Although the current SBA loan requirements can seem restrictive, a little prep can go a long way when it comes to saving you time and getting you the cash you need.
Below, we’ll walk you through the common requirements for an SBA loan and what you need to know to get approved and to avoid the typical pitfalls of first-time applicants.
What You Need to Know Before Applying for a Loan
Before finding out how to qualify for a small business loan, you need to know the basic anatomy of a loan. For good measure, you might also want to take the time to acquaint yourself with the basics when it comes to applying for a loan and maximizing your chances of securing funding.
Personal Credit Score vs Business Credit Score
A staggering number of entrepreneurs and small business owners don’t realize the difference between personal credit scores and business credit scores when applying for an SBA loan. Although personal credit is important, you will need an excellent business credit score to qualify for a conventional loan or SBA loan.
Both credit scores range between 300 and 850, with a higher credit score indicating to creditors and lenders that you of your company can be trusted to repay debts. By repaying debts on time and building a diverse credit portfolio, business owners can bolster their chances of securing funding.
Every loan needs a specific purpose. Otherwise, the lender will assume that the loan is required as startup capital, which might hinder your eligibility. Therefore, it is critical that business owners interested in securing an SBA loan prepare a business plan that delineates exactly where the money is going to be spent.
Is the loan required to pay for new hires, or perhaps a new capital investment in real estate? A creditor’s commercial loan requirements for real estate and other purposes determine the term length, interest rate, and more.
Your business plan should outline precisely how much money you need—no more or less. Since banks are more interested in offering high-value loans ($500 thousand or higher), securing a smaller loan can be difficult through a bank or credit union.
Depending on the value of the loan you need, you may be better served by an SBA Microloan for small businesses. This program is available to entrepreneurs who need less than $50 thousand in financing.
Some commercial loan requirements stipulate that only certain business organizations can qualify. Therefore, how your company is structured plays a role in whether it can access funding. If you find yourself asking “what do I need for a business loan,” first identify what entity type your business is structured as:
- Limited Liability Company (LLC)
- Limited Liability Partnership (LLP)
- Sole proprietorship
Knowing how to get approved for a business loan is useless without first knowing your entity type. This is because some loans, such as SBA loans and some bank loans, are limited to LLCs and LLPs only. Also, most lenders will want to see your incorporating documents (i.e., articles of incorporation) before starting started.
The Nitty Gritty
The minute details matter when it comes to securing financing for your business. SBA loan requirements vary according to your business’s industry, the amount of time that it’s been in the market, and whether you’ve acquired an Employer Identification Number (EIN).
In other words, there is no standard protocol when it comes to applying for and getting approved for funding. This is why it’s so important that business owners cover all their bases when preparing documents for an SBA loan.
Qualifying for a Small Business Loan: A How-To Guide
We’re often asked: what do you need for a business loan? To answer this question as simply as possible, we’ll show you how to qualify for a business loan in five easy steps.
Step 1: Know Your Lender
A strong applicant needs to understand the minimum requirements and qualifications for the loan they’re applying for. If you want the competitive terms offered by SBA-guaranteed loans you need to ensure that your business doesn’t belong to an ineligible industry.
Industries that are banned from eligibility set forth under the small business loan requirements are:
- Consumer and marketing cooperatives
- Dealers of rare stamps and coins
- Government-owned organizations
- Multi-sales distribution
- Pyramid schemes or MLMs
- Nonprofits or religious institutions
If your small business does not fall under any of the disqualified categories listed above, then you may be eligible for approval if your business is a for-profit company that operates mostly in the United States.
Step 2: Establish Your Creditworthiness
Before you secure a loan, you must be able to prove that your business has the means to pay back the debt and a track record of doing so in the past. This is why building business credit early on is so important.
Fortunately for those with a “fair” or “poor” credit score below 700, there are still financing options available for bad credit holders. However, if you want to meet SBA loan requirements and most other business loan requirements, you should have a good business credit score between 700 and 850.
Step 3: Draft A Plan
For the most part, small business loan requirements vary from lender to lender. However, there’s one constant that all creditors require from potential borrowers: a business plan. Without a detailed, written business plan, investors and lenders won’t take your application or vision seriously.
Ensure that your business plan includes an executive summary of your business and its organizational structure, as well as a description of the product or service you’re offering. The plan should also include your funding request, how long you expect to need the money for, and your future financial projections based on existing balance sheets.
Step 4: Prepare Documents
We’re often asked, “what do you need to get a business loan?” Unfortunately, the answer isn’t so simple. Most requirements for a business loan necessitate several documents, including:
- Bank statements (personal and business)
- Tax returns (personal and business)
- Licenses and permits
- Incorporating documents
- Income statement and balance sheet
If you own a startup in need of initial working capital, then you must also draft financial projections. These documents will provide a basic forecast of your company’s financial future over the next two years, including cash inflows and outlays as well as pricing and production estimates.
Step 5: Put Up Collateral
Loans that are backed by collateral are called secured loans. A company’s ability to put up collateral for their small business or startup might seem antithetical at first. After all, why should a company that needs funding be forced to give assets or property to a borrower—isn’t the acquisition of assets where you’re there in the first place?
Nonetheless, collateral provides a modicum of security to lenders who offer low interest rate loans. If a borrower fails to make repayments, the lender can pocket the collateral. If you’re in the market for a secured loan, you must provide a collateral deposit of a predetermined amount.
Different Types of Business Loans
Fortunately, you’ve got options when it comes to securing funds for your business. Listed below are some of the best opportunities for financing your small business or startup that are offered by banks, credit unions, or federal government lenders:
- SBA Loans and Long-Term Loans
- Business Lines of Credit
- Short-Term Loans
- Medium-Term Loans
- Financing (Invoices, Equipment, etc.)
As a business owner with established credit, there are many alternative business loans and more traditional financing options available to you. While some loans may offer a more attractive interest rate or APR, your best option will be the one that suits your business’s specific needs regarding term length, value, the speed of funding, and qualification terms.
Securing Your Loan (And Avoiding Mistakes)
As a small business owner, securing funding can feel like you’re being made to jump through hoops. Keeping a business afloat is difficult enough—coming up with the money to get it off the ground shouldn’t be.
Thankfully, small business loan requirements can be easily met with the right amount of preparation. With the right documents prepared and a long-term business plan in writing, you’re well on your way to applying for an SBA loan. Although they might test your patience, SBA loans offer a low-risk, headache-free solution for getting your company the capital it needs.