Obtaining a loan for a small business can be a time-consuming procedure. By anticipating the normal business loan needs of lenders, you can save on future aggravation.
3 TYPES OF SMALL BUSINESS LOANS
| 1. | Term Loans |
| 2. | Business Lines of Credit |
| 3. | Equipment Loans |
1) Individual and corporate credit ratings
To qualify for a government-backed SBA loan or a typical bank’s small-business loan, you’ll likely need to have great personal or business credit. Internet lenders may be more liberal with credit scores, placing greater emphasis on a company’s cash flow and track record.
Personal credit ratings reflect your ability to repay debts such as credit cards, auto loans, and mortgages. Small-business lenders require a personal credit score since they wish to gauge your debt-management skills.
Often utilized in financing decisions, FICO scores range from 300 to 850. (the higher, the better). You may receive a free credit score from NerdWallet and a free credit report from AnnualCreditReport.com.
Dispute any mistakes in your credit report and pay your payments on time and in full to boost your credit score quickly.
With credit bureaus such as Experian, Equifax, and Dun & Bradstreet, more established businesses will have business credit ratings, which typically range from 0 to 100. Establishing trade lines and maintaining clean public records are two steps toward establishing corporate credit.
2) Yearly revenue
Numerous creditors will only evaluate businesses with a minimum monthly or annual revenue. How much cash flow you’ll need depends on the lender; for example, OnDeck requires $100,000 in yearly income to qualify for a line of credit, but Bank of America requires $250,000 in annual revenue.
If your revenue is modest and you need a company loan, you will likely have to rely on alternative financing sources, such as invoice factoring.
3) years in the industry
Typically, to qualify for a business loan from a bank, you must have been in business for at least two years. Internet business loans typically have fewer severe standards, however, a minimum of six months in operation is typically required.
4) Industry and company size
Government-backed loans from the U.S. Small Business Administration are subject to certain conditions. To qualify for SBA loans, you must check the following extra boxes:
Your business must fit the SBA’s industry-specific definition of a “small” business. Yours can be found on the SBA’s website.
You must operate a for-profit business.
You are not permitted to engage in ineligible industries, such as real estate investing, gambling, or religious activities.
You are ineligible if, for example, you have defaulted on a federal student loan or a government-backed mortgage.
5) business proposal and business plan
Lenders will want to know how you intend to spend the funds and that you have a solid repayment history. They may require a business plan that describes your company’s objectives and how you intend to achieve them.
Some lenders may additionally require a business loan proposal, which describes the loan’s purpose and repayment terms.
These documents must demonstrate that you will have the sufficient cash flow to cover current business expenses as well as the new loan payments. This can increase the lender’s confidence in your firm, hence raising the likelihood of loan approval.
6) Collateral or a personal guarantee
To qualify for a small company loan, you may be required to furnish collateral. Collateral for a business loan is an asset, such as equipment, real estate, or inventory, that the lender can seize and sell if you default on your payments. It’s a mechanism for lenders to recoup their funds if your company fails.
For instance, SBA 7(a) loans over $25,000 need security in addition to a personal guarantee from each owner of at least 20% of the business. A personal guarantee for a business loan compels you to repay the debt from your assets if the business cannot.
Some lenders offer unsecured business loans, which may not necessitate collateral but may nevertheless require a personal guarantee. Lenders may also take a blanket lien on your business’s assets, which is simply another kind of collateral and gives the lender the ability to seize business assets (real estate, inventory, equipment) to recover an unpaid loan.
Each lender has its requirements, so if you are uncertain about what is necessary, you should inquire.
7) Financial and business documentation
When you apply for a small-business loan from a bank or other traditional lender, you will normally be required to submit a variety of documents. The following financial and legal documentation may be required for a small business loan:
- Individual and corporate tax returns.
- The income statement and balance sheet.
- Individual and corporate bank statements.
- A photograph of the driver’s license.
- Leases for commercial purposes.
- Business licenses.
- Articles of organization.
A resume that demonstrates relevant experience in management or business.
If you have limited operating experience, you should develop financial forecasts.
Internet lenders may offer a shortened application procedure with fewer required documents and a quicker underwriting time.
FREQUENTLY ASKED QUESTION
Obtaining a loan for a small business can be a time-consuming procedure. By anticipating the normal business loan needs of lenders, you can save on future aggravation.
1. Term Loans
2. Business Lines of Credit
3. Equipment Loans