Are you a budding entrepreneur looking to take your business to the next level? Business loans can be a great way to make that happen.
But with so many requirements and restrictions, knowing what you need to qualify for one can be hard.
Don’t worry. I’ve got your back!
After years of consulting with small businesses on financing and capital structure, I have the scoop on all the key requirements of acquiring a business loan. Read on to learn more!
What is a Business Loan?
A business loan is a type of financing that allows businesses to borrow money from lenders to expand, refinance, or investing in their operations.
Business loans fund short-term initiatives. They can help businesses access funds quickly to reach their goals faster.
Business can take out loans for many reasons, including:
- purchasing capital assets
- supporting start-up costs
- hiring new employees
- and more.
Business loans are typically secured by collateral such as real estate, equipment, or inventory.
Once a business secures a loan, it must repay it with interest over time.
Whether you’re just starting with your business idea or need money to take your business to the next level, you should consider applying for a small business loan.
Small business loans can provide the funding you need to buy equipment, move into a bigger location, or develop new products. Small business loans can provide cash flow and cover payroll during lean periods.
What’s the Difference Between a Business Loan & A Personal Loan
A Business Loan and a Personal Loan are two different types of loans for unique purposes.
Business Loans help finance an organization’s operations, expansion plans, or other needs.
Personal Loans cover personal expenses such as home improvement projects, medical bills, or educational costs.
Here are some key differences between Business Loans and Personal Loans:
- Business Loans help cover the costs of starting, expanding, or running a business.
- Business Loans usually have higher loan amounts and larger interest rates than Personal Loans.
- Business Loans typically require collateral to secure the loan, while Personal Loans do not require any collateral.
- Business Loans often have more flexible repayment terms than Personal Loans.
Business Loan Pros and Cons
Pro: Lower Borrowing Cost
One of the biggest pros for Business Loans is the low borrowing cost.
Business loans tend to have lower interest rates than personal loans, so you can save money in the long run.
Business loans also offer longer terms and more flexible repayment options.
Pro: Variety of Products
Business loans offer a variety of products to meet the needs of businesses of all sizes.
Businesses can choose from:
- traditional term loans
- lines of credit
- equipment financing
- and invoice factoring
Business owners can also use government-backed loan programs such as Small Business Administration (SBA) loans and U.S. Department of Agriculture (USDA) Business and Industry Loans.
These loan products offer businesses the flexibility to find the best fit for their needs and ensure they get the most from their loan.
Business owners can create customized repayment plans and benefit from lower interest rates, longer terms, and other incentives such as tax deductions or additional capital.
Pro: SBA Loans
Small Business Administration (SBA) loans are government-backed loans that offer businesses a variety of benefits.
Business owners can take advantage of
- lower interest rates
- longer terms
- and more flexible repayment plans than traditional business loans.
SBA loans are guaranteed by the government, which gives lenders added security.
SBA loans are a great option for businesses looking for long-term financing and more flexible repayment plans.
Business owners can use SBA loans to
- fund their operations
- launch new products
- expand into new markets
- or cover payroll during lean periods.
Con: Time
One major con of Business Loans is how long it can take to obtain them.
Business loans are typically more complex than personal loans and require much paperwork and documentation.
As part of their loan application process, business owners often need to provide:
- detailed financial information
- business plans
- tax returns
- credit reports
- and other documents
Business loans can take anywhere from two weeks to several months to process, depending on the lender and the complexity of the loan application.
Business owners should be prepared for a long approval process if they are looking to secure Business Loans.
Con: Documentation
Another major con of Business Loans is the paperwork and documentation required for approval.
Business owners must provide a great deal of information and evidence to secure a Business Loan, such as:
- business plans
- financial statements
- tax returns
- credit reports
- and more
Business owners should plan to submit all requested documents when applying for Business Loans, as this greatly increases the chances of approval.
Business owners should also prepare to provide additional documentation if the lender requests, such as business strategy plans or financial projections.
What You’ll Need to Get a Business Loan
If you apply for a small business loan, you can count on providing a lot of supporting documentation.
Your paperwork should help convince lenders that you’re a safe credit risk. Talk to your lender to ensure you give them everything they need so your loan application processes smoothly.
Look at all the business loan requirements for successful application submission.
1. Personal Credit Score
Your business and possibly your personal credit scores will come into play when you’re applying for a small business loan.
Lenders will especially look at your personal credit score if you don’t have a long business history or much of a business credit history yet.
2. Business Credit Score
A business credit score is a three-digit number that indicates the financial health of your business.
Business credit scores depend on a variety of factors, including
- payment history
- cash flow
- assets
- and other financial information.
Businesses with higher credit scores typically have an easier time securing financing from lenders than businesses with lower scores.
While lenders will pull your credit for you (meaning you don’t have to hand over a copy yourself), you should do what you can to clean up your personal and business credit histories before you apply for a small business loan.
3. Business Annual Revenue
What is the most important business loan requirement? Annual revenue.
Lenders want to see your business’s annual revenue to assess your company’s financial health and the likelihood of repayment.
- Lenders judge businesses with higher annual revenues as more likely to repay their loans.
- Depending on the lender you choose, the minimum can range from $100,000 to $250,000.
Businesses that don’t meet these requirements may find other lenders willing to work with them but should expect higher interest rates or stricter repayment plans.
4. Collateral or a Personal Guarantee
You’ll have to make collateral to qualify for many small business loans.
You can put up business collateral like:
- equipment
- inventory
- or real estate
Or you can put up personal collateral, such as your home.
You may also make a personal guarantee promising to repay the loan from your assets if you can’t repay them from the business assets.
Proof of your collateral and personal guarantee is a necessary business loan requirement.
5. Household Revenue
Regarding business loan requirements, household revenue plays a key factor.
Loan providers will look at your overall household income and compare it to long-term business projections to determine if you qualify for a business loan.
Household income is the combined income of you and every member of your household. It includes:
- Wages
- Salaries
- Retirement payments
- Government assistance like food stamps
Providing evidence of regular, consistent income is essential to approval as it demonstrates your ability to fund business operations.
When preparing to apply for business loans, be sure to provide information about all sources of incoming revenue for your household.
6. Years in Business
Lenders have specific business loan requirements in place to protect their interests.
One of the most common business loan requirements is having at least two years of successfully running your business before you can qualify.
Lenders feel more secure lending to well-established companies with an established track record rather than starting business ventures that might be risky investments.
While this may seem harsh for business owners just getting started, it helps to protect them in the long run. Lenders aim to offer reliable services and can do so more effectively by sticking to these requirements.
7. Business Plan Including Financials
A business plan is the first thing you will need to get together to apply for a small business loan.
A business plan should include
- an executive summary that condenses your business’s aims
- the products or services you provide or plan to provide
- and your plans for future financial growth.
Describe your company in detail:
- Include the useful skills and expertise of key employees
- Explain your company structure
- Do market research to show lenders what sets your company apart from the competition
- Demonstrate why customers choose your services over competitors
- Describe your sales and marketing plan
Always include a detailed financial analysis of your business, including metrics like your net profit margin, accounts receivable turnover ratio, and current liquidity-to-debt ratio.
8. Financial Projections
You’ll need a lot of financial documentation to qualify for a small business loan.
Lenders want to see that your business is profitable or has the potential to be.
To prove your profitability, you need to show your:
- business and personal tax returns
- business and personal bank account statements
- financial projections
- business licenses
- contracts with clients
- commercial leases
- and articles of incorporation.
You may also need to provide a resume listing your experience and qualifications that make you a good choice to run a business.
Top Small Business Loan Companies
ondeck
OnDeck is an excellent choice for business owners who need quick and easy access to financing.
With business term loans and lines of credit, they offer a wide range of options tailored to entrepreneurs looking to invest capital right away.
Their business loan requirements are less stringent than traditional lenders, and their underwriting process is much faster. So you can easily apply and have money in your bank account as soon as the same day.
OnDeck is well-suited for business owners who don’t qualify for a bank loan. It is ideal for individuals who need short-term financing upon short notice.
Shield Funding
Shield Funding provides second chances for business owners who have been turned away from the traditional banking system due to their bad credit scores.
Specializing in business loans for those with lower credit scores, Shield Funding offers individuals a variety of loan options that are easily accessible.
To secure approval, businesses must:
- have been running for at least three months
- possess a minimum credit score of 530
- and generate at least 10,000 in monthly revenue.
With these business loan requirements, business owners can receive a business loan despite their poor credit scores.
Conclusion
Small business loans are a valuable resource for entrepreneurs looking to get the funding they need to realize their dreams.
Business owners must be prepared with all the documents and information lenders require to process the loan correctly.
With some preparation, small business owners can find the best financial product.
Have you applied for a small business loan recently? Share your experience in the comments below!
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