If you’re eager to propel your business forward, securing a business loan could be a crucial step. However, getting approved requires meeting specific criteria. In this comprehensive guide, we’ll explore the seven key requirements you need to fulfill to boost your chances of loan approval. Dive in to uncover these essential prerequisites!
Small Business Loan Essentials
Lenders scrutinize several aspects when assessing a small business owner’s loan application. Here, we break down these critical factors:
1. Credit Score
Your credit score is a fundamental metric that nearly all lenders assess. This score gauges your likelihood of repaying a loan and is built over time through handling various forms of credit, like credit cards or mortgages.
For young businesses, owners typically need to present both personal and business credit scores. Each lender has specific score thresholds; falling below these could disqualify you from securing a traditional loan. Here’s an insight into typical credit score requirements:
| Loan Type | Credit Score Requirement* |
|---|---|
| SBA Loan | Minimum: 650 (Ideal: 700) |
| Term Loan | Minimum: 600 |
| Line of Credit | Minimum: 600 |
| Invoice Factoring | No specific requirement |
| Equipment Financing | Minimum: 520 |
| Business Cash Advance | Minimum: 500 |
Tips to Improve Your Credit Score:
- Personal Credit: Enhance your credit score by paying bills on time, maintaining low credit card balances, limiting new accounts, and disputing any errors on your credit report.
- Business Credit: Establish business credit by opening a business bank account, getting a business credit card, ensuring timely payments, and working with vendors who report to credit bureaus.
2. Revenue
Lenders need evidence that your business can repay the loan, measured by your annual revenue versus your recurring debt. Higher monthly revenue can sometimes compensate for a lower credit score.
Minimum Revenue Requirements:
- SBA Loan: $96,000 annually
- Term Loan: $96,000 annually
- Line of Credit: $50,000 annually
- Invoice Factoring: $10,000 in monthly invoices
- Equipment Financing: Typically starts at $50,000 annually
- Business Cash Advance: $10,000 in monthly revenue
Boost your business’s revenue by exploring new markets, expanding your product line, or adopting new marketing strategies. Consistent revenue growth not only enhances loan approval chances but also reflects business health.
Understanding DSCR:
Lenders use the Debt Service Coverage Ratio (DSCR) to evaluate if a business generates sufficient revenue to cover its debts. A DSCR below 1 indicates insufficient revenue, while a ratio above 1 suggests capability to meet debt obligations.
Typical DSCR Requirements:
A general benchmark is a DSCR of at least 1.25. Improving this ratio, either by increasing revenues or reducing debts, can bolster your loan application.
3. Time in Business
Lenders often require a minimum operational time frame, ranging from six months to two years. SBA lenders typically ask for at least two years of business financial statements, though some are willing to work with startups.
4. Collateral or Personal Guarantee
Providing collateral, such as property or equipment, can back your loan. If you default, the lender can claim this collateral to recover losses. Alternatively, a personal guarantee holds you personally liable, allowing lenders to seize personal assets if the business defaults. Unsecured loans, though free from collateral, still often require personal guarantees and are harder to qualify for.
5. Business Plan with a Loan Proposal
Your application should include a detailed business plan outlining how you will use the loan and projecting growth. Clearly specify how the funds will be allocated and justify these improvements in terms of business growth. Also, present a realistic repayment plan, with contingencies for potential setbacks.
Illustrate your management team’s qualifications to reassure lenders of their competence in steering the business towards success.
6. Industry, Geography, & Company Size
Lenders may prefer certain industries, regions, or business sizes.
Industry:
Some industries are deemed high-risk, subject to stricter requirements or even restrictions. For instance, SBA loans exclude sectors like:
- Loan packaging
- Investment ventures
- Multi-sales distribution
- Speculation
- Gambling
Invoice factoring is limited to B2B or B2G industries, while some lenders specialize in niches like healthcare or eCommerce.
Geography:
Some lenders operate exclusively in certain regions, influenced by licensing requirements or regional economic conditions. Verify that your chosen lender services your business area.
Businesses in economically disadvantaged zones might access special financing programs. Consider exploring these opportunities.
Company Size:
Eligibility for loans may depend on your company’s size, defined by employee count and annual revenue. The SBA offers different thresholds for various industries. Identify your business classification to find suitable lenders.
7. Financial Documentation
Prepare the following documentation for the application process:
- Income Tax Returns (last three years): Prove profitability.
- Balance Sheet and Income Statement: Ensure accuracy.
- Business Bank Statements (3-12 months): Be ready to explain any significant cash flow fluctuations.
- Business License and Registration
- Articles of Incorporation
- Business Plan
You might be more eligible for a business loan than you think. Take a deep breath, complete our quick application, and explore your financing options.
Please note: This information is based on Lendio’s research and might vary based on individual lender criteria. Always review financial institutions’ terms and conditions when evaluating offers.
