Applying for a business loan can be an exciting and intimidating part of a small business owner's journey. Securing a small business loan can take your company to the next level with increased cash flow. Still, many business owners miss out on funding because they don't provide complete loan applications.
Whether you're seeking a small business loan through a traditional bank, a Small Business Administration (SBA)-approved lender, or other alternative forms of financing, there are many application requirements you should be aware of. Some forms of business financing have stricter qualifications than others, so it is wise to gain a solid understanding of various requirements before you apply for a loan.
Continue reading to discover eight of the most common small business loan requirements that will help you qualify for business financing.
1. Strong Credit Scores
Credit history is one of the main requirements that traditional and alternative lenders will consider when you apply for a small business loan. Your personal and business credit history and annual credit report will clue lenders into the likelihood that you'll pay back your loan.
A good credit score demonstrates that your personal finances are strong and that you have a firm handle on managing your finances. Credit scores influence whether or not you get approved for a loan, but they also help determine your interest rates upon approval.
For small business loans, both personal and business credit scores play an important role in approval.
Personal Credit Score
Your personal credit score is the primary indicator of your history as a borrower. To feel confident in getting approved for a bank or SBA loan, you'll want to aim for a personal credit score of at least 600 or higher. Since it takes time to build up a credit history for your business, your personal credit score carries a lot of weight on your application.
Business Credit Score
Business credit scores are also a common requirement because they indicate your business's creditworthiness. Your business credit score is formulated based on your business's history of payments to lenders and suppliers. Industry, annual revenue, and company size can also impact your credit report.
Sometimes, new entrepreneurs are unaware that their business even has a credit score or that it's a standard loan application requirement. Lenders typically understand if you're new to business and haven't had many years to build up a score. In this case, your personal credit score takes precedent.
Bad Credit Business Loans
Don't worry if you're reading this first requirement and feeling discouraged because you have a bad credit score. It is still possible to apply for a small business loan with poor credit. Even still, you should work to raise your credit score so that lenders can take note of your work ethic and improved financial habits. To improve your score, follow these recommendations:
- Pay off debt as soon as possible
- Pay all bills on time
- Keep an eye on your score
- Stay below your credit limits
- Utilize a credit monitoring service
While the business loan application for bank and SBA loans typically requires high credit scores, options are available to you with a poor credit history. Consider applying for some of the best poor credit business loans:
If you boost your application with other strong qualifications, you may be an ideal candidate for a short-term business loan. Short-term business loans are more secure for lenders because the repayment period is typically between 6 and 18 months.
You can expect loan payments to be made weekly, biweekly, or, in extreme cases of poor credit, daily. It is easier to qualify for this type of small business loan, so you can expect approval in as little as 24 hours from some alternative lenders. This loan is an excellent option for increasing business cash flow and working capital.
Invoice financing, or accounts receivable financing, is a fantastic small business financing option for borrowers with poor credit. Invoice financing works by selling your unpaid customer invoices to an invoice factoring company for a cash advance. The company then ultimately receives the payment from the customer on the invoice.
The only credit scores that matter are the ones of the customers paying the invoices. This money advance is technically not a loan since you do not have to borrow money and repay debt. Instead, you pay a small processing fee to the invoice financing company.
To increase cash flow and boost your business's credit, consider utilizing invoice financing. The application process is fast and straightforward with most online lenders.
Merchant Cash Advance
Does your business accept credit card payments? You may be able to qualify for a merchant cash advance (MCA) through online lenders. In an MCA, business lenders provide an advance lump sum payment to small business owners to immediately increase their cash flow. To pay back the money, lenders take a fixed percentage of future daily credit card sales until the amount is paid back in full.
A perk of merchant cash advances is that there is no term limit for repayment because the fixed percentage never changes. This financing option is an excellent resource for small business owners struggling with poor credit.
2. Detailed Business Plan
Now, back to common loan application requirements you should be aware of. Most small business loan applications will require a detailed business plan or loan proposal. Even if it's not needed, providing a business plan can increase your chances of getting approved for the loan amount you need.
Within a business plan, business owners should describe their financial goals and qualitative business goals. Be prepared to include extensive details in your business plan, including:
- Executive summary: What your business does and why it will have financial success
- Company description: Your mission statement, common problems and solutions, consumer base, and unique market advantages
- Market analysis: Trends in your industry's market
- Management: Your business's legal and managerial structure
- Product: The product or service you sell and how it meets consumer needs
- Marketing: How you plan to retain customers through your marketing strategy
- Funding request: Why you need funding, how you will use it, and how you will pay off debt
- Financial projections: Your business's five-year financial outlook
When you provide a thorough business plan with your loan application, a potential lender will feel confident in your ability to utilize and pay off a business loan.
In this same vein, a lender may require a balance sheet. A balance sheet outlines the business's assets, liabilities, and equity. Deduct your liabilities from your assets to conclude how much your company is worth.
3. Provide Collateral
Sometimes, an SBA loan lender will require collateral from potential borrowers. And if it's not required, you can consider offering collateral to strengthen a weak application.
Lenders are always looking for ways to reduce the financial risk of lending money, so collateral offers an extra level of security. Collateral is an asset with financial value that a lender can seize if you do not pay back the loan. Some personal assets are more common than others when it comes to providing collateral.
Collateral assets often include:
- Real estate
- Business inventory
- Money in bank accounts
- Personal loans
Some financing options have collateral worked into the agreement, such as equipment financing and invoice financing. Equipment purchased with an equipment loan operates as collateral, as well as the invoices in an invoice financing agreement.
Some online lenders don't require physical collateral, but they may require security in the form of a personal guarantee. Either way, if you're willing to provide collateral for a bank or SBA loan, the lender will want to know what kind of collateral your small business has to offer and how much it's worth. Before you blindly offer collateral, consider how willing you would be to lose precious assets, like real estate, if you cannot pay off your debt.
4. Time in Business
Lenders prefer to work with businesses that have been in operation for many months or years rather than startups. The longer you've been in business, the easier it is to demonstrate your business's long-term success and financial habits to a lender. Since startups don't have documented proof of how they repay debt and handle finances, lending to them is risky.
On average, you want to aim for two years in business to qualify for a business loan. Many online lenders require at least six months to one year in business, while a bank typically requires two to three years in business.
Before you apply for a business loan, note the lender's requirements regarding time in business to see if you qualify.
5. Bank Statements
Financial statements are a common application requirement for lenders. Bank statements can help lenders understand if you can afford your loan and pay it back on time. Additionally, bank statements give insight into how your business manages its finances.
During an average small business loan application process, you will be asked to provide four months of business bank statements to back up any claims you make about your company's financial health. If you apply for an SBA loan or traditional bank loan, expect to provide even more months of financial statements.
6. Tax Returns
In addition to your creditworthiness and financial statements, lenders often require seeing your tax returns to get a gauge on your personal and business financial health. Income tax returns help indicate your ability to afford and pay back a loan.
A lender will typically want to see the past two years of your personal returns. These documents are especially important if you have a sole proprietorship, partnership, or S-corp that requires you to report your business's profits and losses on your personal tax return.
If you have an LLC or a corporation, you will need to provide the last two years of your business tax returns with your loan application to verify your profit, annual revenue, and expenses.
7. Annual Revenue and Profits
Almost every lender will want to see your business's annual revenue and profits. Depending on how strong your revenue and profits are, they may affect your interest rate after approval. A lender will typically require:
- Year-to-date profit and loss statement, updated within 60 days
- Statements from the past two years
Traditional lenders will want to see that your business is profitable before they approve your loan application. Online lenders do not usually require immense profitability, but they may have minimum annual revenue requirements instead.
8. Business Licences
Last but not least, the loan application will most likely require you to provide your business licenses and permits. This requirement helps lenders avoid fraudulent interactions. A lender will want to see your proof of ownership and license to operate a business. Depending on your business's industry, size, and location, you may also need to provide the following permits:
- Sales tax
- Health department
- Zoning permissions
Prepare in Advance for Your Loan Application
Whether you need a small business loan to build a new location, update equipment, or complete payroll, it is essential to know about application requirements before you begin. If you give yourself plenty of time to research and gather the necessary documents, the loan application process will go smoothly, and you may even receive instant approval for your business loan.
Alternative online lenders like AdvancePoint Capital have ample funding options for small businesses with varying credit histories and time in business. Explore your options on our website, and request a free quote today!