Essential Small Business Loan Requirements
Regardless of your business type, you’re likely to need financial support to sustain your operations at some point. This means you’ll need to approach different lenders for a business loan to supplement your working capital. Up to 40% of business owners do this every year.
Unfortunately, the process of applying for a loan can be pretty frustrating if you don’t know what lenders expect from you. Some lenders have specific conditions you must meet to get loan approval. As a borrower, understanding such conditions can save you time and improve your chances of getting a loan.
In this post, we hope to help you know and understand some of the typical small business loan requirements and conditions you must meet.
1. Personal/business credit score
Before applying for any loan, review your personal credit score. Lenders use this score to assess your ability to manage or pay debts. Plus, the amount you qualify for depends on your score. If your business has multiple owners, each lender must provide their credit scores.
Most lenders prefer to use the FICO® Scores, which range from 300 to 850. A good score is anything from 670 to 739. If you’re an established company, you’ll need a business credit score from Experian, Equifax, or Dun & Bradstreet, and it ranges from 1 to 100. So, the higher, the better.
2. Business plan
Be sure to have a detailed and precise business plan -- some lenders might want to know the purpose of the loan and how you plan to use it to increase profits. Plus, adding the plan to your application helps make your business stand out from other applicants.
Your business plan should detail all the critical business information, such as company description, management team, product/service, current financials, SWOT analysis, and marketing/sales strategy. The plan should demonstrate that the requested loan will be adequate to cover your expenses and other loan repayments.
3. Bank statement & ratings
Lenders usually want to look at your bank statements to gauge the financial health of your business. If you’re borrowing from your bank, they’ll look at your account rating, which represents your borrowing capacity at that bank.
Whatever the case, your rating and bank statement must be pretty compelling to qualify for a business loan. For example, if you want a good rating, your average daily balance should be above $10,000 for at least three months. Your bank statement should also show a steady volume of regular account deposits.
4. Balance sheet
What assets, liabilities, and owner equity do you have? These details are essential for lenders to determine your business’ worth. So, be sure to get your balance sheet ready before applying for a small business loan.
Keep your liabilities down, especially with credit cards and lines of credit. A good credit card balance should be about 10% per account. Still, you can get quick business loan approval if you have assets to back your debt. Regardless, it helps to maintain a convincing balance sheet.
5. Business cash flow
Your business cash flow provides a snapshot of your monthly financial profile. It helps lenders know the amount you take home after paying your business expenses. Consequently, they’re able to determine your ability to meet your loan repayment obligations.
Ideally, most lenders prefer borrowers with a debt service coverage ratio less than 1.25 or 1.35 times their expenses. So, they’ll compare your accounts receivable to accounts payable and review your annual net operating income to determine your cash flow.
6. Collateral or assets
Remember that not all lenders will ask for collateral when you’re applying for a loan. However, it’s vital to get prepared if you apply for a loan that requires collateral. For example, SBA 7(a) loans above $25,000 need collateral and a personal guarantee. Such lenders want to see the assets they’ll seize should you fail to pay the loan as agreed.
The collateral can be equipment, invoices, real estate, and businesses. Some lenders will even request borrowers pledge personal and business assets to secure a loan. Be sure to understand the terms and conditions of loans that require collateral -- it helps to know if they allow you to claim accounts receivable and other collateral.
Understand Small Business Loan Requirements
When learning how to apply for a small business loan, it’s vital also to understand the requirements and conditions for such loans. These loans are not hard to get if you have an excellent credit score and sound business financial health.
However, SBA loans prefer businesses that are already making money. So, if you’re a startup, it’s advisable to try a microloan. Otherwise, be sure to understand the essential business loan requirements of different lenders and get your paperwork ready before applying for any business loan.