bad Credit

Qualifications For A Business Loan: How To Qualify For Funding

Qualifications For A Business Loan: How To Qualify For Funding
Written by Publishing Team

Getting a small business loan can be confusing and frustrating at times. Understand what is required to qualify for a business loan to facilitate the application process and obtain business financing.

Most small business finance is based on three main qualifications: revenue, credit, and time in business. Depending on the lender and the type of financing, there may be additional qualifications including industry, guarantees, business plan, finances, and more.

Small Business Loan Requirements

Three major factors are almost always considered in some way by small business lenders:

1. Revenue

Here lenders want to understand if the company has enough cash flow to pay off the loan or financing. Some lenders have minimum annual revenue requirements (for example, $120,000) while others may require the average monthly revenue for the past three to six months (for example, $10,000 per month on average).

To check revenue, lenders often want to look at a business’s bank statements. Be prepared to provide copies or link your bank account during the application process so that the lender can access that information directly from your bank.

Some lenders, especially traditional lenders like banks, will require business tax returns and may even request personal income tax returns. When tax returns are required, most lenders want to see copies from the last 2-3 years.

Financial statements may also be required. Banks, including those who provide SBA loans with a U.S. Small Business Administration guarantee, may require up-to-date financial statements, such as a balance sheet, income statement, or profit and loss statement. Financial forecasts may also be required.

If your business bills other businesses, you may qualify for billing financing. In this case, you may need to file an accounts receivable aging report or an accounts receivable report. An accounting expert can help you run this report if needed.

2. Credit

Here lenders want to understand how the applicant has managed debt in the past. Some lenders check personal credit reports or credit scores, some lenders check business credit reports and some may check both. (A few lenders don’t do credit checks at all, but this is the exception rather than the rule.)

personal credit

Not all small business financing options require good credit, but many check personal credit scores from 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 medium 600s. Some types of financing are available to those with bad credit (generally less than 620-650).

An initial credit check is often a concessional credit check, and does not affect personal credit scores. However, if you decide to fill out the entire loan application, there may be a difficult credit check that can drop approximately 3-7 points.

trade credit

Some lenders will check for trade credit. They can review credit reports from commercial credit bureaus such as Dun & Bradstreet, Equifax, or Experian. Often times they look for red flags such as excessive UCC deposits, collection accounts or judgments. Other times they will check business credit scores.

3. Time at work

When you fill out a small business loan application, you will be asked when the company will open. That’s because most lenders have minimal time in business requirements. Some need at least two years in the business, while others will provide funding for smaller companies, even start-ups.

If you have a new business, your options will be limited and you may have to provide other information to convince the lender that you will be able to repay the loan, provided they consider financing a startup. This may include a business plan or documents (such as resumes) confirming experience in successfully starting another business, or a proven track record in your field.

If your business (LLC, S Corp, or C Corp) is incorporated, you can use the incorporation date as the start date. Otherwise, you may have to use the date on which you obtained your business license or obtained an Employer Identification Number (EIN).

industry

The type of business you are interested in is also important. Businesses are categorized using NAICS or SIC codes. These are government codes that indicate the industry in which the company operates. Some types of businesses are hard to fund, period. Cannabis or gambling are two examples.

Others may be considered too risky by some lenders but perfectly acceptable to others. Real estate, restaurants and retail stores are examples. Some lenders will provide financing to borrowers who have these types of businesses, while others will not touch it.

side

A guarantee is a tangible thing pledged to secure a loan. It can include heavy equipment, real estate, personal home ownership, inventory, or even future dues. Not all business loans require collateral. In the case of SBA loans, the SBA will ask for collateral if one is available, but lenders cannot refuse loan applications just because the employer has no collateral.

Equipment financing by its nature involves collateral: You pledge the equipment that you finance. Since the financing is backed by collateral, the interest rates are often lower than an unsecured loan without collateral.

loan amount

The amount of funding you seek will also determine what you need to qualify. A $1 million term loan will require much more documentation than a small $10,000 loan, for example. The larger the loan, the more scrutiny there is.

Finance checklist

To prepare for financing, it may be helpful to gather the following information. Not all of this will be required, but having this information at your fingertips can make the application process easier and faster.

personal information:

  • Current driver’s license or passport to prove identity
  • personal tax returns

Business information:

  • Tax returns for the last two years (if applicable)
  • Bank statements for the last six months
  • Business license (if required)
  • foundation
  • Address Verification
  • Canceled Check (against Automated Clearinghouse or Direct Deposit)
  • Franchise Agreement / UFOC (if applicable)
  • Commercial lease agreement (if your business is renting property)
  • Business plan (for a bank loan or SBA loan)

questions and answers

How do I qualify for a business credit card?

Most small business credit cards base their decision on the owner’s personal credit scores and income from all sources (not just business revenue). This means that these cards may be available to small business owners with startups. Most credit cards require good credit, with a minimum credit score of at least 650 and often higher.

How do I qualify for a credit line?

A business line of credit can be an excellent choice for short-term flexible financing. Bank lines of credit may have more stringent eligibility requirements, and often require good to excellent credit. Online lenders may be more flexible but the interest rate is usually somewhat higher.

How do I qualify for an SBA loan?

Most SBA loans are offered by lenders approved by the SBA. (The exception is disaster loans, including EIDL, which are offered directly by the United States Small Business Administration.) There are more than a dozen types of SBA loans, and eligibility criteria vary, but to generally qualify, you must have a small for-profit business. Doing business in the United States, good credit, and making a reasonable investment (equity injection) in the business.

Learn more about SBA loans and how to qualify here.

Is a personal guarantee required for a small business loan?

If the lender does a personal credit check, you’ll want to understand if it’s because it requires a personal guarantee. When you provide a personal guarantee, it means that the lender can try to collect from you personally if the company fails to repay the loan.

What are the easiest small business loans to qualify for?

Getting loans online is usually easier than getting bank loans or SBA loans. Decisions can be made very quickly. In addition, it is important to determine what stands in the way of approval of the loan.

If you have poor credit or bad credit, you may want to at least check out the following types of business loans:

If you have a new business, you may want to consider:

  • Business credit cards
  • Equipment Financing
  • small loans
  • Supplier or seller financing
  • crowdfunding

This article was originally written on January 13, 2022.

Rate this article

This article currently has 1 review with an average of 5 stars.

class = “blarg”>

About the author

Publishing Team

Leave a Comment