If you’re ready to start or expand a small business, you may be looking for funding to make your dream a reality. Finding the right loan can make all the difference. Knowing the small business loan requirements can help you choose a lender that’s right for you.
Common Small Business Loan Requirements
You can get a jump start on securing a small business loan by understanding more about small business loan requirements. These requirements differ depending on the loan program and lender you choose. For instance, requirements for an SBA loan may be more complicated than what online lenders require.
One of the first things prospective lenders will look at when deciding to lend you money for your small business is your credit score. Therefore, your personal credit history will be reviewed by lenders to gauge your creditworthiness, especially if you have yet to establish a business credit history.
If you have yet to seek funding for your small business, you may not be aware of how important your personal credit history plays in your ability to get a small business loan. Lenders see a direct relationship between your personal credit score and your ability to pay loans. It’s important, therefore, to consistently pay bills on time, monitor your credit report regularly for errors, and don’t max out your credit cards.
Be aware that the U.S. Small Business Administration may require a business credit score to qualify for certain loans. If you are just establishing your small business, you may not have sufficient business credit history for an SBA loan.
Amount of Debt
The amount of debt you currently have can have a significant impact on your ability to get a small business loan. Therefore, paying down personal or business debt before applying can put you in a better position from your lender’s perspective.
Another factor used by lenders when considering your small business loan application will be cash flow. Therefore, you need to demonstrate that you can consistently make loan payments. Even if your product or service shows promise and sales are growing quickly, lenders may not be willing to take a risk with your business if you cannot manage unpaid invoices on time.
Lenders typically conduct a cash flow analysis of how money flows in and out of your company, otherwise called your cash flow cycle. While prospective lenders will perform a more complex analysis, you can get an idea of your cash flow by comparing your total unpaid purchases against total sales due at the end of every month. There’s a potential problem if you need to spend more than the cash you will receive.
As a business owner, you should understand the importance of tracking cash flow at all times, not just when you need financing. For example, if your business is new with a lot of start-up costs for equipment or your business is growing quickly, it will affect your cash flow. Likewise, if you have a seasonal business, such as a landscaping or holiday retailer, cash flow analysis can be the difference between business success or failure.
One risk factor that lenders consider is how long you have been in business. Depending on the type of small business loan you want, you may be required to have an established business before you apply. Some lenders need proof that you have been incorporated for at least two years for certain types of business loans. However, the requirement for a working capital loan may be less than one year.
Another way lenders use to reduce their risk with small business loans is collateral. You may be required to identify assets for collateral on your small business loan. That way, if you are forced to default on the loan for any reason, collateral will be used to repay the debt. The value of collateral required could depend on your credit rating, the type of collateral, loan terms, loan amount, and the lender.
Having collateral can improve your loan options. You might use the property for collateral, such as vehicles, commercial real estate, equipment, or inventory. Other collateral can include cash, stocks, bonds, or certificates of deposit (CDs). If your business is new, some small business lenders require personal assets as collateral, including your home or car.
Having a business plan is essential for helping you be strategic about growing a successful business and qualifying for the funding to make it possible. Lenders will look at your business plan to determine how you will use the loan and how you will generate enough income to repay the small business loan.
According to the U.S. Small Business Administration, a business plan is the foundation of your business. It can serve as your guide through every stage of establishing and managing your business. A business plan can be a helpful tool when discussing your business with lenders, investors, customers and collaborators.
What To Include In Your Business Plan
If you are wondering what goes into a business plan, here are six components you may want to include, depending on your business:
- Company description that details the solutions you offer and the competitive advantages that will set your small business apart in the marketplace. Include your mission, leadership team and location.
- Organization and management describe who will run your business and its structure. For example, is the business incorporated as a C or an S corporation, a limited partnership, sole proprietorship or limited liability company?
- Product line or services offered explains exactly what you are selling or what services you provide to customers. You might include patents or copyright information in this section if applicable.
- Market analysis describes your target market and competition in your industry. You must understand trends and challenges your small business will face and convey to lenders how you are positioned to succeed.
- Funding request outlines how much money you are applying for and how your small business loan will be used. Be specific when explaining whether funding will be used for equipment, marketing, salaries, or business expansion.
- Financial projections outline how you intend to use the revenue to make on-time business loan payments. Suppose you are operating an existing business, including the balance sheet, cash flow and income statements. Those will be projections if your business is new.