Small business loans are a popular source of financing for small business owners, but securing one can be challenging. Understanding the requirements for a small business loan can help increase the chances of approval. This article explains how to get a small business loan and the different types of loan requirements. Keep reading to learn more.
Who can apply for a small business loan?
Small business loans are not personal loans but financial assistance available to individuals, partnerships, corporations, and other entities engaged in for-profit business activity. Anyone looking to start or expand an existing business may be eligible to apply for a loan. Different online lenders and traditional lenders may have different requirements for eligibility, so it’s important to research options before applying.
Is it hard to get approved for a small business loan?
The approval process for a small business loan varies depending on the lender. Generally, it requires a business to provide financial documentation and credit history. It’s important to have a well-thought-out plan for using the loan funds and be able to demonstrate the ability to repay it in order to get approved.
Requirements for a Business Loan
Obtaining a business loan requires meeting certain criteria. Here are eight business loan requirements to be aware of:
1. Personal and Business Credit Score
A good credit score is essential for obtaining a business loan as lenders will check your credit report from credit bureaus. This includes both personal and business credit scores.
2. Cash Flow and Debt History
Strong cash flow is needed to make payments on the loan. A lender will also review the balance sheet, income statement, debt and repayment history along with the debt-to-income ratio of the business to determine whether they can handle taking on another financial obligation.
3. Collateral
Most small business lenders will require some form of collateral before they extend a loan to a business, such as commercial real estate, accounts receivable, or other business assets.
4. Time in Business
Established small businesses with track records of success may have an easier time obtaining small business financing than those just starting up, so it helps to have been in operation for at least two years before applying for financing.
5. Proof of Ability to Repay Loan
Lenders want assurance that you can repay what you borrow and may ask for proof from tax returns or other financial statements that demonstrate your ability to do this over time.
6. Length of Loan Term Requested
Most lenders favor shorter-term loans rather than longer-term ones. This is because short-term loans generally pose less risk to them due to their shorter length. They’re also more profitable given their higher interest rates compared with long-term loans that have lower interest rates spread out over several years.
7. Purpose of Funds Requested
Define how you will use the funds in order to convince lenders that your investment has potential value and return on investment. Some requests may not be funded depending on the purpose requested such as speculative investments.
8. Documentation Requirements
To receive funding, most lenders require additional documentation like a well-crafted business plan outlining the purpose of the loan, types, and amounts requested and estimated repayment schedule with principal and interest calculations prior to approving any financing requests.
Requirements for a Small Business Loan Application with SBA
A small business owner may choose to apply for an SBA loan instead of a traditional business loan as it offers more flexible terms. If you’re wondering how to get an SBA loan, the following documents and criteria must be met:
- Business and personal financial statements: Applicants must provide financial statements for both their business and personal finances.
- Business plan: A detailed business plan outlining the company’s history, goals, and financial projections is required.
- Proof of collateral: The SBA requires collateral to secure the loan, and applicants must provide documentation showing proof of ownership.
- Legal documents: These include business licenses, tax returns, contracts, and any other relevant legal documents.
- SBA loan application: Finally, applicants must complete and submit an SBA loan application, which includes personal background and financial information, business history, and loan request details.
How to Get Approved for a Small Business Loan
Applying for small business loans can be daunting, but with the right preparation, getting approved is possible. Here are some tips to help you get approved:
- Research Lending Institutions: It’s important to research different lending institutions and their qualifications prior to applying.
- Develop a Business Plan: Create a comprehensive and well-thought-out business plan that outlines your company’s goals and objectives.
- Organize Financial Documents: Gather all of the necessary financial documents needed to apply, such as tax returns, personal financial statements, and bank statements.
- Clean Credit History: A clean credit history is essential for loan approval so make sure to check yours before applying.
- Collateral & Guarantors: Collateral may be required by lenders as security for the loan, and having a guarantor can also help increase the chances of approval. A personal guarantee will put your personal assets at risk.
What disqualifies you from getting an SBA loan?
While the Small Business Administration (SBA) offers loans to entrepreneurs and business owners, there are certain factors that can disqualify an applicant. These can include having a criminal record, being delinquent on taxes or other government loans, or being unable to demonstrate the ability to repay the loan. Businesses that engage in certain activities, such as speculative investing, may also not be eligible.
What is a reasonable amount for small business loans?
A reasonable amount for a small business loan will depend on the resources available to the borrower and the intended use of the funds. Generally, loan amounts range from $50,000 to $5 million, with loan terms requiring monthly loan payments and lasting up to 25 years. It’s important to evaluate your individual circumstances when considering an amount that is right for you.
What documentation is required for a small business loan?
To apply for a small business loan, applicants typically need to provide several documents. The small business loan documents you’ll need can include a business plan, financial statements such as tax returns and business bank statements, and legal documents such as business licenses and contracts. Lenders may also require personal financial statements from business owners and information on collateral that will be used to secure the loan.
What credit score is needed for an SBA loan?
The Small Business Administration (SBA) does not have a minimum credit score requirement for its loans. However, individual lenders who participate in SBA loan programs may have their own credit score requirements. Generally, a credit score of 680 or higher is considered good for SBA loan eligibility.
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