Qualifying for a small business loan is easy as long as you meet the lender’s requirements. You, however, need to understand what the requirements are before proceeding to the application stage. Below are five steps to help you qualify for a small business loan.
1. Build Your Personal and Business Credit Scores
You stand a better chance of securing a small business loan if your personal credit score is good. A credit score is based on your ability to repay credit cards, car loans, mortgage and other personal debts. Most lenders use the FICO score when making lending decisions, which is premised on five factors: your repayment record (35%), credit card and other debts (30%), length of credit (15%), credit types in use (10%), and recent credit inquiries (10%). Your personal credit score is important to a lender since it shows them how you manage debt.
To build a good credit score, pay your bills on time and scrutinize your credit reports for possible errors. If you identify errors, get them corrected as soon as possible.
Although a good personal credit score helps, established businesses with good credit scores stand a better chance of securing a business loan. Most lenders are interested in your business’s track record and cash flow as a demonstration of your ability to repay the loan.
2. Find Out What the Lender’s Minimum Requirements Are
Make sure your application meets a lender’s minimum requirements and qualifications. This sets you off on a solid ground and increases the chance of your loan being approved. You stand an even better chance by meeting and exceeding the minimum requirements. These include a good credit score, the age of your business, a healthy cash flow, and annual revenues. You may have a hard time convincing a lender to give you a loan if you have a history of delinquency or recent bankruptcies.
You stand a better chance with online lenders, but they too base their decisions on your ability to pay, demonstrated by a good credit score, a healthy cash flow, and respectable annual revenues. An online lender may however still grant you a loan in spite of a recent bankruptcy. The only caveat here is you will pay a higher interest rate.
3. Get Your Legal and Financial Documents
Among legal and financial documents most lenders will ask for include business and personal income tax returns, personal bank statements, income statements and balance sheet, commercial leases, a copy of your driver’s license, articles of incorporation, business licenses, financial projections, and others.
Fulfilling these requirements can be time-consuming. It is, however, important to take your time to get them before submitting your application. However, if you are looking for a quick loan, an online lender may be your best bet since their streamlined online application process is faster and requires less documentation. With a good credit and a healthy cash flow, an online lender may even match the prevailing bank loan rates.
4. Have a Strong Business Plan
A lender needs proof you will use the funds to grow your business and increase sales. They want to know how you plan to use the loan once you get it. This is because they understand your ability to pay depends on your business’s profitability. They are, therefore, likely to ask you to submit a business plan with details of your reasons for seeking a loan and how you will use it to increase profits. The business plan gives a lender confidence that you will indeed be able to repay the loan.
Some lenders require collateral before approving your small business loan application. Collateral gives a lender a fallback option should you be unable to repay the loan as agreed. The collateral required vary from lender to lender. Besides the collateral, a lender may ask for a personal guarantee from you as the business owner, which ties to your personal credit score and assets. Other lenders may waive collateral requirement but insist on a personal guarantee.