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Next Read: Is A Small Business Loan Secured Or Unsecured?
If you’re looking to secure a small business loan, there are many things that you will want to make sure are in order and healthy.
Lenders consider the following requirements when evaluating a potential small business owner for a business loan:
Nearly every lender will look at your credit score when they evaluate you for a potential loan. A credit score is essentially a measure of how likely you are to pay back a loan. It’s calculated over time as you apply for and pay back credit cards, car loans, home mortgages and other debt.
Business owners of a young company will likely need to show their personal credit score as well as their business credit score (and yes, there are two scores). Depending on the lender, they all have a score threshold they will not go below. For example, the threshold for a bank is often significantly higher than that of an alternative lender—say 680 instead of 550.
It’s difficult for anyone to offer a small business owner a loan if there’s no clear evidence they have the capacity to repay the loan.
Most lenders will evaluate your ability by comparing your annual revenue against your recurring debt. Nobody wants to see you default on a loan, which is why an early-stage or idea-stage company with no product on the market to sell and no income has such a tough time securing financing. In some cases, a higher monthly revenue will make up for a lower credit score.
Time in business is another common metric lenders use to measure capacity. Time in business requirements vary widely from six months to two years. A handful of lenders will work with startups.
Collateral is an asset such as property, cash or larger assets like equipment that a loan applicant offers as a guarantee on a loan. If the business defaults on the loan, the lender can claim the collateral.
Instead of collateral, some lenders will ask for a personal guarantee, which allows the lender to seize personal assets if the business defaults on the loan. Essentially you accept personal liability for the business loan.
Some lenders offer unsecured business loans, that don’t require collateral. In general, these loans will be harder to qualify for since they are riskier for the lender.
Along with your business plan, you will want to address how your business will use the loan and expected growth projections.
Lenders will want to know specifics. Are you investing in new equipment? Hiring more employees? Expanding or upgrading your office space? Don’t leave anything out. Specify what it will be used for with corresponding dollar amounts.
You’ll also want to articulate why you need these improvements. How will these investments grow your business?
There should be two parts to your answer:
Lenders want to see a realistic vision of how the invested capital will expand and grow your bottom line so that, ultimately, they receive repayment.
It takes more than money to grow a successful business. If your team is underqualified or experiencing any kind of dysfunction, you’ll want to take this into consideration when you think about the risks of taking on debt. Make sure your team is qualified and has the resume to impress lenders.
Many lenders place restrictions on the types of industries they will work with or will have more stringent requirements if an industry is considered high-risk. Certain loan types, such as SBA loans and invoice factoring, also have industry restrictions.
The following industries are restricted from qualifying for an SBA loan:
Learn more about SBA loan requirements
Invoice factoring companies only work with B2B or B2G industries.
Other lenders specialize in specific industries such as healthcare or eCommerce. By applying through Lendio, we can connect you with the lender that is the best fit for your industry.
Most lenders will require the following documentation as part of the application and approval process:
You’re probably more qualified for a small business loan than you think you are. Just take a deep breath, fill out our 15-minute application, and explore your options.
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