Whether you’re starting up your own business, or are ready to expand an already launched one, at some point you are likely to need an injection of cash at some point. After all, “cash is king” as they say. And when spent wisely, investment can return profit and dividends.
But, you may well ask, exactly how easy is it to get your hands on a business loan? And what are the different factors that can affect being granted one or being turned down flat.
In this article, we’re going to discuss how someone qualifies for a business loan, and exactly who is eligible for a small business loan.
Once we’ve answered all these questions, you might want to scroll down to the very end of the article where we point you in the direction of several other related articles, which can help you on your business journey.
Please note, this first part of this article focuses on general business loans made available via banks, while the later part of the article will focus on small business loans obtained through the U.S. SBA, Small Business Administration. And in particular, we will focus on the SBA 7(a) loans and the SBA 504 loans.
How do you qualify for a business loan through a bank?
Qualifying for a small business loan via a bank depends very strongly on your credit score. Your credit score will determine how much money a bank is prepared to lend your business, and what the terms of the business loan will be.
And this goes for both your personal credit score and your business credit score.
As a general rule of thumb, banks only tend to give small business loans to those with a credit score of at least 550 for merchant cash advances, 600 for short term financing, 630 for business lines of credit, and 680 or higher for a traditional small business loan.
If your credit score is lower than 700, you may struggle to get approved for a small business loan from a traditional bank.
5 Steps To Qualifying For A Business Loan
There are 5 main steps in qualifying for a business loan, and we will look at each one in turn.
Step 1 - Building your credit scores
We’ve already mentioned the importance of a healthy credit score when you are applying for a loan. You may feel that it’s unfair that banks will also look into your personal credit rather than just your business credit score, but they have to pay due diligence.
Besides, who would want to lend out money to someone with a poor record of paying their credit back. It simply stands to reason that banks would take this into account.
If you are in a position where your business has yet to prove that it will pay back any money owed on time, then sometimes they will be a little lenient and make judgments on this by looking at the business’ cash flow instead.
Step 2 - Research the lender’s minimum requirements
Lenders have the right to set their own requirements. And these are not necessarily all going to be identical. So, once you have a shortlist of lenders that you’d like to work with, you need to find out exactly what their requirements are.
Step 3 - Gather your financial documentation and legal documentation
Here is a list of some of the most common documentation you may need:
- Personal and business bank statements.
- Balance sheet and income statement.
- Personal and business income tax returns.
- Business and commercial licenses
- Articles of incorporation.
- Financial projections
- An up-to-date resume
Step 4 - Have a strong business plan
If you don’t already have a good business credit score, then this element of the qualifying process could be crucial. It gives you the chance to show that you will have sufficient cash flow to not only cover your business expenses, but also enough to make the loan repayments.
The business plan should also lay out exactly how you plan to spend the money provided in the loan, and how it can be used to increase money coming into the business.
It’s beyond the scope of this article to go into detail about how to develop a strong business plan. But what we will say is that it should demonstrate both your current financial situation of the business and its projected financial future.
And it should also include an analysis of the industry your business is in. Remember, the stronger your ability to pay back the loan, the greater your chances are of being granted it.
Step 5 - Present collateral and/or personal guarantee
Now, every lender has its own rules about this, which is why Step 2 of the process is so important. Some lenders will ask for business collateral, while some are satisfied with a personal guarantee.
Business collateral is basically any property of the business, whether it’s real estate or equipment, that can be seized and sold by the lender if you fail to make your payments. A personal guarantee on the other hand puts your personal credit score and assets on the line instead.
If you’re confident that your business will go well there is no reason not to offer collateral.
Who is eligible for a small business loan?
Now to look at small business loans obtained through the SBA. Exactly what size of business do the SBA consider a small business? According to the SBA, to be classed as a small business, the business must have a maximum of anywhere between 250 and 1500 employees…
However, this maximum differs according to the specific industry that said business is in. Please refer to https://www.sba.gov for more information.
How do you qualify for a SBA 7(a) loan and who is eligible?
First off, let’s start off with what an SBA 7(a) loan is. It’s a business loan that can be used for:
- Short- and long-term working capital
- Purchase furniture, fixtures, and supplies
- Refinance current business debt
The eligibility criteria for a SBA 7(a) loan is as follows:
- The business is for profit
- Considered a small business
- Doing business or intending to do business in the US
- Already made reasonable investment in the business
- Tried using personal credit before hand
- Able to prove there’s a need for the loan
- Use of the loan strictly for business
- Not owing any debt to the US government
How do you qualify for a SBA 504 loan and who is eligible?
First off, let’s start off with what an SBA 504 loan is…
It’s a long term small business loan that can be used for the purpose of business growth and job creation, and the purchase or construction of or modernization of:
- Existing buildings or land
- Machinery and equipment
The eligibility criteria for an SBA 504 loan is as follows:
- The business is for profit
- Doing business in the US or its territories
- Have a tangible net worth of under $15 million
- Have an average net income of under $5 million after federal income taxes for the two years preceding your application
So, in short, in order to be able to successfully apply for a business loan, whether it’s a government backed SBA loan or a more traditional business loan from a bank, you will usually need to have a good credit score, and to have a good working business model.
Here are some related articles you might want to check out elsewhere in our website:
- How can I get a $100,000 business loan? available on this link
- How much can you borrow for a small business loan? available on this link
- What is a typical business loan terms? available on this link
- How can I get a small business loan? available on this link
- What a bank needs for a business loan? available on this link
- How can a woman get a business loan? available on this link
- Who qualifies for an SBA 504 loan? available on this link
- How do I qualify for a business startup loan? available on this link
- How hard is it to get a startup business loan? available on this link
- How can I get a business loan with no money? available on this link
- How do I qualify for a SBA 7a loan? available on this link
- Should I get a business loan or line of credit? available on this link
- Can I get a business loan with no assets? available on this link
- What can be used as collateral for a business loan? available on this link