The 6 Most Important Requirements for a Business Loan
Are you concerned that your company financing application will be rejected? Meet these criteria and you’ll have a better chance of getting approved.
If you’re ready to grow your business, you’ll need working capital to pay for new staff, office space, materials, equipment, marketing, and other expenses. Not every aspiring business owner has the necessary funds to get their business off the ground. This is when business loans come in handy.
Business loans, like most good things, aren’t easy to get. They carry a higher risk for the lender than a personal loan, resulting in tougher eligibility requirements. Many business owners want to get a business loan, but aren’t sure if they meet the requirements. It doesn’t help that there isn’t a lot of information on small-business loan requirements on the internet.
We’ve sorted through all the loan application requirements for business loans so you don’t have to, to help you cut through the noise and receive financing for your business.
It’s time to get funded after you’ve finished developing a business plan with financial estimates and proven fiscal responsibility. (Keep in mind that success is in the details.)
Lenders examine six key components of a borrower’s profile when examining them, and they may set a minimum threshold for each. A solid credit rating and an annual income of at least $100,000 are common small business loan requirements (although some lenders may go as low as $75,000 if you’re new to the business).
However, because exact requirements differ from lender to lender, we’ve researched a number of lenders who can accommodate your specific requirements.
- Credit. Lenders usually always evaluate a small-business owner’s personal credit when they request funding. As a result, maintaining a strong personal credit score is critical. When seeking to acquire a decent business loan, it’s also beneficial to build solid credit for the business itself.
- Income and cash flow. When assessing a company’s risk, lenders look at its debt-to-income ratio. The greater a business’s cash flow and income, the more likely it is to secure a loan.
- Age of business. Most lenders only lend to enterprises with a two-year track record, which makes it difficult for new businesses to gain funding.
- Debt amount at the moment. Debt is the other component of the debt-to-income ratio. Borrowers and businesses with excessive debt may have a tough time receiving new loans.
- Collateral. Collateral-based loans are easier to get and have lower interest rates because lenders consider debt backed by valuable assets to be less risky.
- Industry. Lenders evaluate the risk of your type of business during the loan approval procedure. Loans are simpler to come by in some industries than others.
Types of loans
Before we get started, let’s go through the many sorts of loans available to small business owners. Our guide is below.
- With a business line of credit, you can spend up to a set amount and only pay interest on what you actually spend.
- Equipment loans can help you pay for anything your business needs in its day-to-day operations, not simply heavy equipment.
- The amount of your unpaid invoices is paid to you through invoice factoring loans (also known as accounts receivable finance). No more waiting for late-paying clients—the lender pays you the invoice amount (less a charge), and then collects from your clients so you can get back to business.
- Merchant cash advances exchange a lump sum payment for a certain percentage of future sales.
- Peer-to-peer lending is a relatively new technology that allows you to borrow a certain amount of money from a group of investors through the internet.
- The US Small Business Administration backs SBA-backed loans, making them generally reliable and low-interest loans.
- Term loans can provide you a large sum of money in as little as 24 hours, but they come with high interest rates.
- Unsecured business loans are those that don’t demand any collateral. Unsecured loans make up the majority of business credit cards and lines of credit.
- Working capital loans provide you with the finances you need to cover day-to-day expenses, pay staff, and deal with profit dips.
A word on term lengths: short-term loans give you money to spend with the assumption that you’ll repay the full amount within 18 months (though the duration varies by lender—some loans have a longer term limit, while others have a shorter term restriction).
Long-term financing is better for long-term investment in your business; while short-term loans can help you get through a seasonal slump in sales or help you buy a critical piece of equipment, long-term financing solutions provide you with a larger sum of money to help you grow your business and profits.
- Credit – High interest rates can seem like a blow in the gut for business owners considering a loan. However, the higher your credit score, the more likely you are to get approved for a loan with a low interest rate. Keep in mind that lenders consider both personal and business credit scores and histories when making lending decisions. Personal credit is much more critical for small-business owners because they don’t have business credit.
Information on credit score tiers
Credit score tier – FICO credit score
|Bad credit||Below 600|
You are entitled to a free annual credit report from each of the three main credit agencies, Equifax, Experian, and TransUnion, under the Fair Credit Reporting Act. You can order all three at the same time or spread them out over time.
There are other “free” credit reports and scores available outside of the main credit bureaus. Unfortunately, these scores are rarely used by lenders for making credit decisions. We propose that you get a personal FICO credit score, which will cost you money. Because 90% or more of lenders utilize the FICO scoring system, this is the credit score that matters.
Don’t be too concerned if your credit score and history are poor. For applicants with less-than-stellar credit scores, there are numerous sorts of bad credit loans available.
Lendio’s different types of bad credit loans
When qualifying for specific loans, Lendio, one of our favorite sources for business loans, only requires customers to have a credit score of 550. It’s vital to remember that a credit score of 550 is considered subprime, which means most lenders would turn you down. However, using Lendio, you can still be connected with lenders who are willing to work with you.
We recommend the following funding choices if you have a solid credit score:
|Loan type||Minimum credit score needed||Lowest listed interest/factor rate||Main borrower requirement|
|Merchant cash advances||550||18%||4 to 6 months of financial history|
|Invoice factoring||550||5%||Invoices from paying customers|
|Equipment financing||550||7.5%||12 months of business history|
|Peer-to-peer lending||650||5.99%||Assessment by a peer lender, not a bank or the lending marketplace|
G-Force Funding’s different types of good credit loans
|Loan type||Minimum credit score needed||Lowest listed interest/factor rate||Main borrower requirement|
|SBA loans||620||4.75%||2 years of business tax returns|
|Lines of credit||560||8%||$50,000 in annual revenue|
|Term loans||550||6%||Bank or P&L statements as proof of revenue|
Because of their longer terms, terrific rates, and reduced monthly payments, these loans are considered the holy grail of small-business financing. Keep an eye out for an SBA lender in particular; loans authorized by the US Small Business Administration are easier to qualify for and generally come with cheap interest rates.
- Cash flow and income – Your business can make or break it. A consistent and healthy flow of cash shows lenders that you can make the loan payments. It’s essentially a representation of the health of your business. Lenders will most likely look at expenses in addition to income to determine how profitable your business is. If you’re starting a business or don’t have enough cash flow, we recommend looking into our five favorite business loans for startups.
If your company deals with invoices on a regular basis, you’ve probably dealt with the pain of late payments. Unpaid invoices can have a significant impact on a business’s turnover and cash flow. Fortunately, invoice factoring is a viable funding alternative for business owners.
Invoice factoring, also known as accounts receivable financing, is a financial transaction in which a company sells its unpaid invoices to a third-party lender. Rather than waiting for your customers to pay their invoices, you’ll have extra cash flow to assist you reach your business goals, pay payroll, and pay your monthly operational bills on time.
- Age of business – Approximately 20% of businesses fail in their first year. 1 It’s no surprise, then, that most banks and internet lenders demand a minimum business age from borrowers. The minimum business age requirement might range from six months to two years in most cases. Keep in mind that lenders consider the length of time the business’s bank accounts have been open, not the length of time the business has been registered with the government.
Traditional lenders and banks are unlikely to approve you unless you have two years of business experience. But have no fear: there are a number of alternative internet lenders with less stringent approval processes than traditional lenders, making them viable options for start-ups and businesses with bad credit.
Age-of-business requirements for certain lenders
|Lender||Min. revenue||Min. time in business||Min. credit score|
|Funding Circle||N/A||2 yrs.||660|
- Current amount of debt – Next, lenders consider your debt-to-income ratio, which compares the percentage of your monthly debt payments to your total monthly income. A debt-to-income ratio of 50% or less is required by most lenders. As you might expect, small-business lenders are hesitant to lend to borrowers who have previously taken out other loans. Create fail-proof payment plans and stay away from excessive interest rates to prevent falling into debt.
Lenders will want to see a balance sheet in addition to a debt-to-income ratio. This is a simple document that describes the financial condition of your company, including assets, liabilities, and equity. Your total assets should, in theory, equal the amount of your liabilities and equity accounts. A balance sheet can assist business owners evaluate whether they should spend to expand or save for a rainy day. While it may appear daunting, maintaining a balance sheet is an essential duty for every business. Plus, if you come prepared with one, lenders will offer your business bonus points.
Maintain a minimal credit card and line of credit balance to improve your personal profile (usually around 10% per account). A high credit card balance not only damages your credit score, but it also has a negative influence on your personal finances. So don’t go crazy with your spending and run up your credit card balance.
Lenders often require a personal guarantee from business owners when a company lacks a financial track record. If you can’t return the debt, the lender can go after you personally, even if you have an LLC or a C corporation.
It’s crucial to keep in mind that not all debt is created equal. The lender gives varying weights to commercial real estate, lines of credit, business acquisition loans, and merchant cash advances. However, regardless of the type of debt you have, if it is backed by assets, you will be accepted more quickly.
- Collateral – Lenders may require collateral, such as invoices, equipment, real estate, and businesses, in order to approve a loan. Business car loans, believe it or not, might also require collateral. The term “collateral” refers to actual assets that the business owner currently owns. To obtain a business loan, certain lenders may demand borrowers to pledge both business and personal assets. We recognize that this isn’t the best position for a company. However, there is some good news: some business loans do not necessitate collateral. Certain types of company loans have flexible repayment terms and are simple to apply for.
If you have to go into debt, do so wisely. Use debt to purchase income-generating assets whenever possible. Having several sources of income isn’t simply a survival strategy; it’s also a wealth-building approach. Your loan could and should pay for itself within a reasonable time frame if you buy an office complex or an existing business with a steady cash flow. Smart asset management can also boost the asset’s income.
Business loans with a collateral requirement
|Loan type||Typical loan amount||Typical interest/factor rates||Typical terms|
|Commercial real estate||$250,000–$5,000,000||4.25%–6%||20–25 years|
|Invoice factoring||Up to 80% of receivables||5%||Up to 1 year|
|Business vehicles||$10,000+||5%||4–6 years|
|Business acquisition||$5,000–$5,000,000||5.5%||Revolving or 10–25 Years|
- Industry – Many lenders consider the industry in which your company operates as a decision factor. In other situations, they may steer clear of risky industries, such as those regarded as socially undesirable or with unstable income flow.
Many lenders will not lend to businesses in the marijuana, gambling, or adult entertainment industries, for example.
Seasonal industries, on the other hand, can face difficulties. If you own a seasonal business like a golf course, landscaping company, or ice cream truck, you know how important it is to have enough cash flow to keep your business running during the off season. Getting approved for a business loan may be tough, but not impossible, given the ups and downs of these types of businesses.
What’s next now that you know what most lenders require? These actions are recommended to assist you in obtaining the loan you require.
- Find out your credit score online – www.creditkarma.com is a great service.
- Find a lender that is a good fit for your credit score, annual income, and industry.
- If you don’t want to deal with collateral, stick to unsecured loans.
- Gather financial records, such as bank statements, balance sheets, tax returns, and your business license.
- Make a new business plan or improve an old one.
- Calculate your origination fee, or the amount of money you’ll have to pay up front to get a loan.
Following these procedures can help you approach your lender with more confidence—and eliminate any financial or other shocks.
Credit cards vs. small-business loans are two more options.
Do you require quick and easy cash? Perhaps in the hundreds rather than the thousands? Some of the benefits of business credit cards are similar to those of personal credit cards: they provide fast cash to fund smaller projects (though we shouldn’t call it “cash”—think of it as a loan with an earlier due date and a potentially higher interest rate). They can also be beneficial if you wish to improve your business’s credit score in order to apply for a loan with better terms in the future.
Business credit cards, like personal credit cards, have their own set of drawbacks. The temptation to keep piling up credit card debt might put your business permanently in the negative. Only use a business credit card for expenses that you can pay off before the following billing cycle, and remember what we stated about debt ratios earlier: a business credit card can help you improve your credit score, but it can also increase your debt-to-income ratio.
A quick overview on business credit cards
If you only need a little amount of money and can pay it off before the next credit card bill is due, a business credit card may be a better option than a loan.
Small projects are ideal for this and developing a business credit score. However, unfavorable for full-fledged business financing or if the debt-to-income ratio has risen.
Don’t think you’ll be able to get a business loan? Instead, take out a personal loan.
There is no such thing as a one-size-fits-all solution when it comes to qualifying for a company loan. While you may believe that to get the best small-business loan, you need a perfect credit score and a high annual income, most lenders consider a variety of factors. If you lack in one area, such as a low credit score, you may be able to secure a loan based on the strength of other areas, including a lower level of existing debt.
You may also improve your chances of getting a business loan quickly by planning ahead and making wise financial decisions.
The loan requirements listed above can affect not just whether you are approved for a loan, but also your interest rate.
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