Despite the wealth of funding options available to small businesses, business loans are often the most popular choice. Many business loans offer favorable terms such as long-term repayment options and low-interest rates.
Qualifying for a business loan, however, can be tricky business. There are a lot of hoops to jump through, but with the right guidance you can significantly improve your chances of qualifying. Let’s take a look at the steps you need to take to successfully qualify for a business loan.
How to qualify for a business loan.
1) Meet the conditions and minimum qualifications of the lender
Minimum qualifications and conditions are set to ensure you’re the right candidate for a loan. Candidates who exceed the requirements and minimum qualifications have the best chances of qualifying for a business loan.
In most instances, if you’ve had recent delinquencies or bankruptcies your chances of qualifying for a business loan will be slim to none. Lenders also look at annual revenue, number of years in business, and credit score amongst other criteria when qualifying an applicant for a business loan.
Do your research and ensure you meet the conditions and minimum qualifications of the lender to ensure you’re not wasting your time.
2) Provide collateral
Some lenders require collateral before they’re willing to qualify an applicant for a business loan. Collateral can encompass a variety of assets such as real estate or equipment. If you default on the loan, the lender can seize and sell your holdings as a way to recoup their money.
In addition, most business loans generally require a personal guarantor from the business owner of 20% (or more) of the business. That means if you fail to pay back the loan your personal assets can be seized and your credit score may be affected adversely.
If you’re not willing to risk your personal assets as collateral, you could try unsecured loans. While unsecured loans come with various benefits, they also have a number of disadvantages that need to be taken into consideration such as shorter repayment terms and higher interest rates.
3) Build your credit score – Both personal and business
When it comes to your personal credit score, the higher the range (300 to 850) the better. Lenders will use your credit score as a form of risk assessment. If you have a low rating that classifies you as a high-risk borrower, and the chances of you getting a loan with favorable interest rates (or a loan at all for that matter) are slim.
Aside from personal credit scores, lenders also take your business credit score into consideration. Just as your personal credit score determines your individual creditworthiness, a business credit score determines the creditworthiness of your company.
Some lenders will look at both your personal and business credit scores to aid them in the decision-making process of approving you for a loan. Additional factors such as cash flow, length of time you’ve been in operation and revenue also play a role in your ability to qualify for a business loan.
4) Gather the proper documentation
Most traditional lenders require legal and financial documentation. Gathering the appropriate paperwork can be time-consuming and downright daunting for many businesses. Speak with your bank to see what documentation is required to apply for a loan and double check the list to ensure you have all of the paperwork you need.
Some of the documentation you will need includes:
• Commercial Leases • Driver’s license • Articles of incorporation • Income tax returns (personal and business)
5) Create a sound business plan
How will you use the money you intend on borrowing? What’s your plan of action to pay back your loan? Lenders want assurances that you’ll be able to pay back your loan without running into significant issues.
A sound business plan allows you to showcase how you intend on using the money to improve your business, whether through marketing, bringing on more employees, expansion, etc. Lenders need to see that you’ll be able to generate enough future cash flow to continue operating your business as well as keeping up with your loan payments.
Alternative funding for your business
A business loan may be exactly what you need to expand your small business. However, if you hit hard times, you may end up taking on more debt than you can handle. Consider why you’re taking out the loan and if you need the money in the first place.
Business loans aren’t the only option to fund your business. One Park Financial provides quick funding to help you handle the immediate needs of your business. Applying is painless and easy, and our team of professionals will be more than happy to connect you with alternative funding options for your business.