Small Business Loan Requirements

Anne Miller

Anne Miller

Senior Author

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Anne Miller

Senior Author

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No matter how well business is doing, there are times that you would need to get a loan because current revenues simply do not suffice.

To assess the risk associated with your business, lending institutions would look for certain documents. The business loan documents required may vary from one lender to another, but there are still a series of paper works which is mandatory across all creditors.

However, before even thinking about the business loan requirements, do you really need the loan?

What are legitimate reasons for taking out a small business loan?

While there may be legitimate reasons for you to take out a business loan, many have used this device for no clear purpose at all.

Even if you have deemed your justification to be falling under one of the general reasons listed here, determine the specific purposes of the loan as well.

 

Funding day-to-day operation expenses

Small Business Loan RequirementsEspecially when you are just starting out, your business may not always have clients, leaving you out on a negative. Does that mean you should decide to shut down operations? Definitely not.

Until your business takes off and earns enough to keep itself afloat, you can take out a loan to keep things running. This may be used to pay salaries, to buy inventory, and to finance all other capital costs.

Starting a business

If you have a great idea and business plan that you believe will be a great success, you can try your chance at crowd funding and grants. However, the success you have at getting funding from those options are minimal.

Thus, instead, you can take out a business loan to fund your business endeavor. Depending on the quality of your credit history and of your business plan, a certain amount will be awarded to you.

Growing your business

Business is good, and you want to expand your operations or perhaps your product/service line. Unfortunately, above your day-to-day expenses, you may not have enough.

With a loan and a solid marketing plan, you can grow your business even if you do not have the funds yet. There are interests, sure. However, the returns can be greater in the long run compared to if you waited to accumulate the necessary capital.

Setting aside for an emergency

Work to have the best, but expect the worst. When disaster strikes, you do not want to be left empty-handed. Anticipating emergencies means that you will have enough cash on hand to cover the extra expenses.

It can even be for a non-disastrous situation. For example, you receive a very large order which your inventory and your operations cannot cover. Instead of rejecting business, you can outsource or order the extra raw materials for your product by using the money from the loan.

What are the usual small business loan requirements?

What is required to get a small business loan? Depending on where you are going to apply for a small business loan, the requirements will vary. Here are the documents that you may need to be considered for a loan.

Loan Application Form

Aside from the documents that banks and other lending institutions would ask for, they usually provide a loan application form that you will need to fill out. Like on any official paperwork, make sure to provide only accurate and complete information.

Personal Information

Although the loan is meant to fund a business expense, personal information remains to be one of the most basic business loan requirements. Among other information, previous and present address, educational level, aliases, and criminal record (if any) would be required by your creditor.

Business Plan

In traditional lending institutions, all people looking to apply for a small business loan would be required to present a business plan for your creditor’s review. Your business plan should cover all of the following areas:

Executive summary

This one-page paper should be concise yet be able to explain the nature of your business, its operations, the revenue model, as well as marketing efforts. Despite the number of documents they require, some loan officers only base their decision on this.

As you will need to pass more elaborate versions of each area discussed here, it is best to do this last.

Business description

In this part, you would need to discuss in detail what your business does, and how it profits. Include some data, but leave the financial analysis which we will get into for later.

Target market and the competitive landscape

In detail, describe where you conduct business and who your target market is. A customer avatar can be helpful in determining this, so you can talk about how you would appeal to this group as well.

You must also assess the competition objectively, and include how you will set your business apart from them.

Product and/or service

If approved, your ability to pay your loan depends on the marketability and effectiveness of your product and/or service. Here, explain how it works. Discuss its “sellable” features and how your business can attract customers to these.

Marketing, promotion, and sales

How does your business plan to increase brand and product awareness? This should be detailed here. Provide the marketing tools you plan to use (over the line or under the line advertising, website, Facebook ads, promotions, etc.).

Management team

For the bigger roles in your company, describe who is assigned to do which, and their relevant experiences. This should increase your lender’s trust in your plan as the ones handling it are competent.

Financial data

Based on current revenues, provide a cash flow projection, a sample balance sheet, and profit-and-loss statements. Also show them a break-even analysis which includes monthly loan payments as an expenditure.

Appendices

Here, include any research you conducted which you have also used in other parts of the business plan. All the properly labelled charts and graphs may also be put here, along with the company logo and other relevant images.

Business Credit Report

One requirement for a business loan is a business credit report. Credit score of 650 and above is considered a good rating, while a business credit score of 600 or below is considered. The latter may make it difficult for you to get approved for loans in traditional banks and credit unions.

To increase your business credit rating, you can pay off outstanding debts or open a business line of credit and pay your monthly fees in full.

Personal Credit Report

Part of the application process is obtaining your personal credit report. Get this from all three consumer credit rating agencies. Discrepancies on the results should be addressed and cleared up before submission.

If you fail to do so, you will have less chance of getting your loan approved as they will see this as an attempt to hide or to blemish information.

Collateral

While collateral is not always a requirement for business loan, substantial loans will require an equally substantial collateral.

As lenders would definitely want to find out, you should know as well the value of the collateral you plan to put up. Having a collateral usually means lower interest rates as the loan is secured.

What should I consider before deciding on a lending institution?

These factors can also be used to determine what type of lending institution is best suited for your needs. Some of these factors, as listed below, are what creditors consider before your loan approval as well.

 

Personal credit rating

Most loans that do not require collateral need a personal guarantee. This means that in case your business assets or its revenues would not be enough to settle the balance, you would take it as a personal responsibility to do so.

Generally, an excellent credit rating means creditors would see your loan as low-risk. However, this alone cannot guarantee approval.

Business credit rating

Being the responsible entity for the loan, lenders look at business credit rating as well. Here, what is considered high or low is the same as that for a personal credit rating. If you want to raise the credit rating of your business, you can take out short-term loans and pay the monthly dues religiously.

Financial history

Most traditional lenders require an extensive financial history to get approved for a loan. Thus, if your business is relatively new, focus on prospects that only need a few months of financial history to qualify.

Collateral

Depending on how much your business needs, lenders may need you to put up a collateral. This should be valuable, like a house or a business asset.

Approval and funding time

If your business needs the money immediately, a lot of the options may immediately be closed to them. While you may be able to meet the most stringent business loan requirements, funding time would ultimately determine whether you should or should not go for a funding option.

Where can I apply for a business loan?

Today, you have more options where you can take out a loan. These generally differ in their strictness regarding the requirements for a business loan, and their risk appetite.

When seeking your funding options, consider your current status based on the following qualities lenders usually look for. Then, choose the one most suited to your needs and current situation.

Banks

For businesses with:

  • High personal and business credit rating
  • Extensive financial history
  • Collateral
  • At least three years of continuous business operation
  • No need for immediate loan approval

Banks are deemed a traditional lending institution. Before the 2008 financial crisis, they had relatively relaxed policies regarding loan approval. However, the same cannot be said for today.

Now, aside from excellent personal and business credit rating, they also closely look into the credit history and usually require a collateral.

On top of that, the loan processing usually takes 30 to 60 days, making it a bad option for businesses needing the cash immediately. Most of their loan products are more apt for big and more established businesses, so the approval rate for small businesses are very low.

Small Business Administration

For businesses with:

  • Good personal and business credit rating
  • Extensive financial history
  • Collateral
  • No need for immediate loan approval

SBA offers several loan products which your business can use for a variety of purposes. Their qualifications are almost as strict as a bank’s, however, the funding does not come directly from them. Instead, they connect you to one of their accredited lenders.

Despite the stringent business loan requirements, they do offer interest rates below industry standard. Unfortunately, the process is rigorous and time-consuming.

Credit Unions

For businesses with:

  • Good personal and business credit rating
  • Collateral
  • No need for immediate loan approval
  • An owner who is a member of a credit union

Credit unions operate like banks, but are owned by their members. These institutions still require good credit ratings, but not as excellent as banks would require.

Here, the most basic requirement for business loan is credit union membership. Meaning, you must have an account in the credit union where you are going to apply and meeting their other membership qualifications.

Aside from being relatively more lenient that both the bank and the SBA, credit unions have loan products targeted specifically to small businesses.

Alternative Lenders

For businesses with:

  • Any personal and business credit rating
  • Need for immediate loan approval
  • Need for flexible payment terms

One of the highlights in opting alternative lenders is the ease of application process and quick funding. This means that for as long as you have the business loan documents required on hand, you can proceed with the application.

Most alternative lenders are online, so application is conducted using that medium, particularly their website, as well. When it comes to personal and business credit scores, they are very lax that you can even qualify for some with a credit score of as low as 500.

However, it does come with one major fallback. As their targeted borrowers are those who cannot get approved in banks and other lending institutions, the interest rates are much higher. Thus, consider this the last option.

 

Now that you know the relevant what’s and where’s, you can apply for a business loan. While your chances of approval are dependent on credit rating and history, the accuracy and completeness of your documents can also make a difference.

Anne Miller


Anne is a Senior Author for SBL. She began her career as an independent consultant for local businesses after graduating with a BA in Management. Since that time, she’s expanded to writing as well as consulting to spread helpful knowledge to small business owners across the country.

 

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