Getting a business loan in 2020 is no small feat. Between the global pandemic and the ensuing economic downturn, lenders of all stripes fear protecting their cash flow and preventing loans from defaulting. At the same time, millions of American businesses are struggling for the same reasons that make lenders think, so millions of people are looking for funds at the same time as lenders are cracking down.
With so much going on from lenders, creditors are understandably worried about vetting potential borrowers in light of the current economic climate, so getting credit can be difficult. If you want to obtain financing, it is essential to understand the requirements for get a small business loan before applying.
Requirements by loan type
|Type of loan||The biggest obstacle to qualifying|
|Term loan||Time in business|
|SBA loan||Application process|
|Business line of credit||Generate sufficient free cash flow|
|Commercial real estate loan||Create reliable business income|
If you need financing for your small business, there are several loan types to choose from, each with their own terms and requirements. Commercial mortgages, for example, generally have lower interest rates than lines of credit, but they also generally require a higher interest rate. credit rating. SBA loans are easier to qualify than bank loans, but have more documentation requirements than most other forms of financing.
Outraged, SBA loans are not meant to be a borrower’s first option. SBA financing seekers are believed to have tried to obtain financing elsewhere first and have been turned down – so keep this in mind when deciding which loan is best for you.
While the requirements vary depending on the type of loan, you likely won’t qualify for any type of business financing unless you meet certain minimum criteria. These include having a credit score of 600 or higher (640 for SBA loans) and a debt service coverage ratio of at least 1.15 to 1.3 – which means you should have at least 15-30% free cash flow more than what your loan repayments will cost you each month. Online lenders love Quick financing could offer more flexible terms than conventional lenders, such as banks or credit unions. [Read our full review of Rapid Finance for business lending.]
5 steps to qualify for a small business loan
To get a loan, small business owners must follow a set process. When applying for financing, borrowers need to provide a lot of information about themselves and their businesses so that lenders can assess their risk and creditworthiness.
Not taking the right steps can hurt business owners’ credit and reduce their chances of obtaining financing. So if you want to get a loan, be sure to follow these steps.
1. Do your research.
Before applying for a small business loan, it is important to research and understand the different types of loans available. You need to know the requirements for the types of loans that may be right for you, as well as the repayment options and types of documents required for approval.
2. Choose a loan.
Once you have considered various loans that may be suitable for your small business, decide which ones may be right for you based on your business needs and desired repayment terms, as well as which ones you may be entitled to.
When deciding on a type of financing, be sure to consider loans with rates and terms that are realistic for your credit rating and income, and not on the best possible terms advertised by lenders, to whom you may not be eligible.
3. Choose a lender.
Once you know what kind of loan you want, you need to find someone to give you the loan. If you already have a relationship with a bank or other lender, it’s usually a good idea to take a look at it first. If you don’t already have a relationship with a lender, try to find one that specializes in the type of financing you want and has repayment terms that work for you.
4. Evaluate yourself.
Once you’ve decided what type of loan you want and which lender you want to use, there’s one final step before you apply – and that’s to assess yourself as a borrower. Check your credit using Credit Karma or another tool, and review your own finances to make sure you have the credit rating to qualify and can pay your payments.
When checking your finances, make sure your income and expenses can be documented. If you cannot document parts of your income, your lender may not be able to consider that income as part of your loan application.
After you’ve assessed your credit and finances, consider whether you would approve your loan if you were a lender. If the answer is no, take steps to improve your credit for your finances before going ahead with a loan.
5. Apply for a loan.
Now that you have chosen a lender and assessed your chances of being approved for financing, you need to apply. This process varies from lender to lender, but is generally fairly straightforward, involving several pages of paperwork.
You should know that your loan application will require the lender to file a credit check, which will affect your credit score. That’s why it’s important not to apply until you’re ready and know what your lender will find when they review your application.
Plus, when you apply for funding, you may start to incur costs. Because lenders have to perform credit checks or assess the value of the assets against which you are borrowing, you may be charged a fee. If you need to put your application on hold and start it again later, you may need to pay these fees twice.
Even after you apply for funding, your job may not be finished. More often than not, you will need to follow up with your lender to provide additional documentation or explain specific items related to your income, expenses, or credit score.
If all goes well, you will get approval and close your loan. If you want to get approval for another loan in the future, you will need to comply with the loan terms, making full and on-time payments. You will either need to repay your loan on time or, if your loan is not fully amortized, start looking for a new loan to refinance the lump sum payment at least four to six months before your lump sum payment is due.
Other financing options
If you need a loan for your small business, four of the most common options are term bank loans, SBA loans, lines of credit, and commercial mortgages. However, these options don’t work for everyone. If your credit is low or you haven’t been in business for a short time, you may need to find another way to finance your business.
If you need more options, there are three main types of small business financing.
- Factoring: If your business regularly bills customers and you want to get your money back faster to grow your business, factoring may be a great option for you. With factoring, you can essentially sell your unpaid invoices (to eligible customers) to get your money faster, and the factoring company takes care of collecting payment from your customer.
- Business credit cards: Small business credit cards work just like personal credit cards – in fact, they’re usually based on a business owner’s personal credit. These cards can offer long 0% introductory periods and useful rewards for businesses that need to fund routine purchases.
- Personal loan for business: If your business does not have established credit or several years of income history, you may be able to get a loan only based on your personal financial strength. With a personal loan, you can get financing without a lender having to consider your business finances. You’ll need to sign a personal guarantee, but you’ll likely need to provide one with a business loan anyway.
Tips for Approving Small Business Loans
With the economy still struggling following COVID-19 shutdowns, millions of small businesses need financing to survive the downturn. If you find yourself in this situation, it’s important to maximize your chances of getting the money you need.
Follow these tips to give yourself the best chance of getting approved.
1. Leverage your relationships.
When you begin to consider lending options, don’t be afraid to contact people you know personally at banks or other lending institutions. Working with someone you know won’t guarantee that you will be approved, but it can make the application process easier – and it helps to have someone who can vouch for your character when the lender reviews your application.
2. Optimize your personal credit.
When you check your credit before applying for a loan, you will likely find negative items on your credit report. Whether it’s unpaid credit card balances, a high credit utilization rate, or old credit accounts that have been closed but are still listed on your report, do what you can to improve these elements. Your lender will eventually take your credit out, so it’s best to deal with these issues yourself first.
3. Prepare yourself.
When preparing to apply for a loan, it’s a good idea to get all of your paperwork together first. Your lender is going to ask for them anyway, and putting everything together before you apply will help your lender move through your application faster. It will also reduce the number of gaps or items that you will need to clarify later.
Here are some things to prepare before applying:
- Two years of tax returns
- Your company’s balance sheet and income statement
- Commercial operating agreements
- Identification and tax documents for anyone holding 20% or more of your business
4. Don’t procrastinate.
Applying for a loan takes some time. Even after getting approved, you won’t necessarily get your money back right away, so don’t wait until you need the money to apply.
If your lender asks you for something to help you complete your application, be sure to get it to them quickly. Lenders usually try to process multiple requests at the same time, and every time they have to wait for things from you, your request goes down their pile.
5. Know your options.
The last tip we have for borrowers is surprisingly simple, but it’s a tip business owners often forget to heed: Know what type of loan will work for you. before you ask. If you apply for the wrong type of loan, you risk being refused funding and having to start the process over with a different type of loan. This can hurt your credit or even lead to your business closing for lack of money.