How to Qualify for a Small Business Loan

Qualifying for a business loan requires finding the right funding solution for your small business and learning of the various funding options available to your small business. Determine if you qualify for a small business loan by learning what each lender is looking for, and make the best decision. You’ll find qualifying for a business loan is not such a difficult, confusing process. To help you navigate the ins and outs of small business loans, we break everything down for you here.

Small Business Loan Requirements

Qualifying for a small business loan may take some time, depending on the lender. It is important to understand the basic qualification requirements to make the process easier.

Follow these steps to qualify for a small business loan:

  1. Build Personal and Business Credit: The better your credit score, the easier it is to qualify for a small business loan.
  2. Write a Business Plan: Lenders use your business plan to assess risk and measure the probability you’ll repay the loan.
  3. Put Forward Collateral: The higher the collateral value you put forward, the less risk you pose to potential lenders.
  4. Choose the Right Loan and Lender for Your Business: Selecting the right loan depends on your business's needs and the affordability of the loan.
  5. Gather and Organize Required Documents: Qualifying for a loan means having the right documentation, including your tax ID, business formation documents, bank statements, etc.
  6. Apply for a Small Business Loan: Whether you apply online or in person will depend on the lender, but the process is the same. You’ll fill out an application, answer questions, and submit your documents.

1. Build Personal and Business Credit

Think of business credit as an asset. Should you ever sell off your business, you’ll be selling your business credit rating with it. Credit can be more valuable than cash in the bank. It is important to build both personal and business credit and protect it at all costs.

How to build business credit:

  1. Pick the right business structure
  2. Get a federal tax ID number or Employer Identification Number (EIN)
  3. Open a business checking account
  4. Do business with vendors who report to the business credit bureaus.
  5. Monitor and repair your business credit profiles

2. Write a Business Plan

Lenders require you to submit a business plan before they’ll finance your business. This is to ensure that your business is worth financing.

A business plan helps you develop a strategy to grow your business. Part of the strategy involves finance planning for a small business loan in the future. Other parts of the business plan detail a marketing and sales strategy as well as a daily method of operation to ensure your business makes money and becomes successful.

How to write a business plan:

  1. Start with a business plan template or business plan generator.
  2. Fill out the template using your critical thinking skills.
  3. Write the plan for a loan.
  4. Let trusted friends and experts give you honest feedback and advice.
  5. Revise your plan until it works.

3. Put Forward Collateral

Collateral is something of value used to secure a business loan. Collateral value is the value of that “something” used to guarantee the loan. The higher the collateral value, the less risk of you defaulting on the loan. If you don’t pay back the loan, the bank or lender takes possession of your collateral and recoups their loss and then some.

Types of collateral:

  • Real estate: Parcel of land, developed or not.
  • Other real property: Cars, equipment, etc.
  • Cash secured loan: Active business accounts seized and liquidated if you default.
  • Inventory financing: Inventory the business owns
  • Invoice collateral: Accounts receivable yet to come in
  • Blanket liens: A legal claim allowing the lender to dispose of your business assets if you default

4. Choose the Right Loan and Lender for Your Business

There are many types of business loans and lenders. Choose the right loan and lender for your business to ensure you help your business in the best way possible.

Types of business loans:

  • Business term loans: Lump sum, repaid in equal installments over a period of time.
  • Business line of credit: Cash access to money when needed, interest on what you spend, to be repaid before the loan ends.
  • SBA loans: Government-backed term loans with lower interest.
  • Short term loans: Term loans with shorter repayment periods, generally 6-18 months.
  • Merchant cash advance: Advances on future credit card sales at much higher interest.
  • Equipment financing loans: Longer term loans with more favorable interest rates used to purchase equipment for the business; the equipment serves as collateral.

Types of lenders:

  • Banks: Traditional bank loans, business term loans, and business lines of credit
  • Online lenders: All types of loans, less favorable rates than traditional banks
  • Predatory lenders: Dangerous loans with extremely high interest rates

5. Gather and Organize Required Documents

To qualify for a business loan, you will be required to submit a loan application along with the required documentation. The lender will determine what documentation you must submit with your loan application.

Here are the most common loan documents:

  • Tax returns
  • Bank statements
  • Cash flow statement
  • Income statement/Profit and loss statement
  • Balance sheet
  • Business lease
  • Government-issued ID
  • Business plan
  • Business certificate/license

PRO TIP: Keep digital copies of these documents to make it easier to apply for online loans or to send via email when requested by your lender.

6. Apply for a Small Business Loan

Applying for loans will vary slightly depending on the lender. Traditional banks will require you to visit a local branch to fill out the application and talk to a loan officer. Online lenders will require you to apply online through their website, submitting digital copies of your business documents. SBA loans have more requirements, as they’re partially backed by the US Small Business Administration.

SBA Loans:

  1. Select the right SBA loan.
  2. Understand the SBA lending requirements.
  3. Find an approved SBA lender.
  4. Apply directly through the lender; they’ll help you.
  5. Wait to be approved.

Bank Loans:

  1. Gather your business documents.
  2. Determine the best bank for a business loan.
  3. Dress professionally.
  4. Visit your local bank branch.
  5. Ask to speak with a business loan officer.
  6. Explain you want a business loan.
  7. Answer questions asked by the loan officer.
  8. Fill out a formal business loan application.
  9. Wait to be approved.

Online Loans:

  1. Make digital copies of your business documents.
  2. Determine the best online loan for your business.
  3. Apply for a business loan through their website.
  4. Wait for a decision, usually within a couple of days.

Not Qualified for a Business Loan Yet?

Alternatives to Small Business Loans

Even if you qualify for a business loan, it’s worth checking into alternative funding sources for your business. You may be surprised by the number of options available. The most common loan alternatives are friend and family loans, bootstrapping loans, small business grants, business credit cards, crowdfunding, and investors.

Friends and Family Loans

Most startups get their initial investment from friends and family members. This is true and, in most cases, is a better option because interest is less, and repayment terms are more favorable. Make sure you treat a loan from a friend or family member the same way you would a traditional lender.

Here’s some advice:

  • Present them with a business plan.
  • Let them know how the money will be spent.
  • Give them access to your financials and be transparent with them.
  • Insist on a repayment contract, detailing terms and conditions, etc.
  • Pay back the loan on time, early if possible.

Bootstrapping

Most small businesses are started on a shoestring budget with personal savings by the person starting the business, a practice known as bootstrapping. As you bring in those initial sales, that money goes back into growing the business, and with a little luck (i.e., good business acumen), the business eventually supports itself and the business owner.

The drawback to bootstrapping is it may take longer to build a business. But, if you’re looking to avoid having too much debt, this may be the best solution for your business.

Here’s some advice:

  • Save as much money as possible.
  • Have a plan for continued funding.
  • Make sure you can support yourself financially.
  • Outline a bootstrapping plan in your business plan.

Small Business Grants

There is free financial help for small businesses known as small business grants. Grants are great because they don’t have to be repaid, and there is no interest either. Most would agree that free money is better than a loan.

How to get a small business grant:

  1. Find a small business grant
  2. Learn the requirements
  3. Determine eligibility
  4. Write a grant proposal
  5. Apply

Resources:

Business Credit Cards

Business credit cards are another option if you can’t get approval for a small business loan. One strategy is to apply for a secured business credit card. A secured card is one where you put up a security deposit to guarantee that you’ll repay the credit card bill each month. With a good repayment history, you’ll get your deposit back, and your card will become an unsecured business credit card.

Here’s some advice:

  • Pay your bill off in full each month.
  • Don’t spend more than 30% of your credit limit.
  • Wait a year to request an unsecured credit card.
  • Wait a year to request a credit limit increase.

This is a great way to build business credit so you qualify for a small business loan later.

Crowdfunding

Crowdfunding is when many people give a little to help a business grow and thrive. There are many great crowdfunding platforms where you can create an account and request help funding your business. Kickstarter is one great example.

Investors

If all else fails, find an investor that is willing to help you with the expectation of something in return. Investors lend money to your business at a cost. It could be they want a percentage of your business or repayment at a higher interest rate than what a bank would charge.

Here’s some advice when working with investors:

  • Look for investors who believe in win-win investing principles.
  • Know what you’re giving up and decide if it’s worth it.
  • Shop around to find the best investor for your business.
  • Learn the art of negotiating before negotiating with an investor.

Conclusion

Qualifying for a business loan is easy when you know what your options are and what each lender requires. It is important to pick a business loan solution that is not only available to you but also one that works for your business.

Give some thought to alternative lending options if you find a business loan is not right for your small business at this time.

Small Business Loans FAQ

What is the criteria for a small business loan?

The criteria for a small business loan will depend on the lender you are applying with. We advise you to check with the lender first before you make any assumptions.

You’ll need the following:

  • Tax returns
  • Bank statements
  • Cash flow statement
  • Income statement/Profit and loss statement
  • Balance sheet
  • Business lease
  • Government-issued ID
  • Business plan
  • Business certificate/license
  • Loan application

How do I get a first time small business loan?

To qualify for a small business loan, you’ll need to do the following:

  1. Decide which loan is best for your small business.
  2. Pick a lender who offers the loan you’re seeking
  3. Gather together your business documents
  4. Complete an application
  5. Submit the requested business documents
  6. Wait to be approved

Is it hard to get a small business loan?

The difficulty is determined by the type of loan you are seeking and the lender. For example, if you’re applying for a traditional term loan through a bank, you’ll likely be denied if you have no established business credit. If you’re applying for an online loan, they are not as strict on their requirements, and you may be able to qualify for a business loan. If you’re a new business or small business, we recommend applying for an SBA 7(a) loan. These are backed by the government, so they’re easier to qualify for when you’re trying to get funding for your small business.

What is the easiest business loan to get?

Online loans with higher interest rates are easier to qualify for than traditional bank loans and SBA loans. It’s best to select a lender that best suits your needs, and if this is not possible, try our alternative lending solutions.

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