What do I need before getting a business loan?
It can take a lot of time to find and apply for a business loan. Our business attorney are often asked, “What do I need to get a business loan.” When you know business loan requirements prior to applying, it can make the application process smoother and altogether less frustrating for the lender and yourself. The requirements the lenders need for a startup business loan are the same for a mature business. Our San Diego small business attorney highlights the the seven main business loan requirements that you need to get a business loan.
- Business and personal credit scores
To qualify for a business loan, such as a traditional small business loan or a government-funded SBA loan, you need to have good credit score (usually a 690 or more) or business credit that is excellent. What credit score do you need to apply for a business loan depends on the lender, and debt service coverage ratio, discussed below.
Alternatively, online lenders tend to be more forgiving when it comes to credit scores. Rather, they prefer to look at your company’s track record and cash flow as a business loan requirement. Certain online lenders are okay with a personal credit score of 500 in order to qualify for a business loan.
A personal credit score suggests that you are able to pay back a business loan, since it reflects credit cards, mortgages, and car loans. As a business loan requirement, a small business lender will ask for a personal credit check since they want to observe the way you handle debt. A moderate to high credit score is what you need to apply for a business loan.
Typically used in decisions regarding lending, FICO scores go from 300 to 850. To see if you may qualify for a business loan, you can receive a free copy of your credit reports on AnnualCreditReport.com.
If you need to get a business loan, you should focus on building your credit to qualify for a business loan. Quick methods of building credit include paying bills in full and on time and arguing any inaccuracies on your report. More-established businesses will have business credit scores (going from 0 or 1 to 100) with credit agencies like Equifax, Experian, and Dun & Bradstreet. To grow business credit, you need to maintain clean public records and establish trade lines.
- Yearly Revenue
Often, as a business loan requirement, lenders only take seriously companies that offer a minimum annual or monthly revenue. A lender will study your company’s revenue to ensure that there is sufficient cash flow to pay back a business loan.
The amount of cash flow you need will depend on the particular lender. For instance, most lenders require $100,000 in yearly revenue to qualify for a business loan. As a business loan requirement, Bank of America asks for $250,000. This doesn’t mean that you need $100,000 to apply for a business loan; depending on the lender, your business may have a lower revenue requirement.
If you have low revenue but want to get a business loan, it could be you need rely on other financing options, such as invoice factoring.
Debt Service Coverage Ratio
To see if you qualify for a business loan, your lender might also consider a similar metric: the debt service coverage ratio, or DSCR. The ratio looks at your present debts compared to your available operating income. To compute your DSCR, you need to divide your yearly operational income by your complete yearly debt.
For instance, if your yearly income is $200,000 and your complete debt is $150,000, your DSCR is 1.3. In general, you need a ratio of 1 or higher to interest a lender, as this shows that the cash flow is enough to cover the debt.
- Years in operation
To qualify for a business loan from a financial institution, you need to be operational for a minimum of 2 years. Business loans online typically have less strict business loan requirements, but they usually want a minimum of 6 months in business.
- Business size and industry
There are different risk levels for every industry. Certain industries, such as beauty services and restaurants, may be regarded as high risk since they have less consistent revenue. Therefore, it may be harder to get a business loan in these fields.
Also, some industries completely turn off lenders, meaning it is almost impossible to qualify for a business loan. If you work in adult entertainment, money and gambling service, or drug dispensary services, you will likely not be able to get a business loan. In this case, you need to to find a private lender to apply for a business loan.
The U.S. Small Business Administration offers government-backed business loans, but there are specific business loan requirements for these. To qualify for business loans under the SBA, you need to tick off these business loan requirements:
- The business must qualify as a small business under the SBA to qualify for a business loan, which can vary according to industry. This may be verified on the SBA website.
- The business must be for-profit to qualify for a business loan.
- You need to be in an eligible industry – not gambling, political lobbying, or investing in real estate.
- Government loans need to be in good status and have no previous defaults. You will not get a business loan if you have been late on a mortgage backed by the government or federal student loan, for example.
- Business loan and business plan proposal
A business loan lender wants to understand how you intend to use the funds and understand that you are likely to repay. Thus, they may ask for a business plan that indicates your business goals and how you intend to achieve them. You need to submit a business plan proposal for some lenders, which will detail the business loan’s purpose as well as how you plan to repay it.
The documents should show that you have enough cash flow to handle the new loan payments as well as ongoing business expenses. Essentially, you need to make the lender confident in your business, which will increase the chances you get a business loan.
- Personal guarantee or collateral
To qualify for a business loan, in some cases you need to offer collateral as a business loan requirement. Business collateral may be defined as an asset, like equipment, inventory or real estate, that the lender may seize and sell if you are unable to pay back the business loan. This a way for lenders to recover their funds if the business cannot pay back the loan.
For instance, Small Business Administration loans over $50,000 usually require collateral in addition to a personal guarantee from each owner that has at least 20% of the company. A personal guarantee for a business loan means you need to repay the amount owed from your own savings if the company cannot.
Certain lenders offer unsecured business loans. These do not make physical collateral a business loan requirement, but they usually come with a personal guarantee. A lender might also put a blanket lien on assets belonging to the business, which is essentially another kind of security. This gives the lender the right to seize business assets, such as inventory, real estate, and equipment to recover an unpaid business loan.
Every lender has their own business loan requirements, so be sure to ask questions when unsure.
- Financial and business documentation
Traditional lenders and banks usually ask for a lot of paperwork to see if you qualify for a business loan. The legal and financial documents you need to provide for a business loan usually include:
- Business and personal income tax returns
- Financial data, like balance sheets, loss and profit statements, and cash flow statements
- A driver’s license photo
- Business and personal bank statements
- Business licenses
- Commercial leases
- Evidence of collateral
- Articles of Incorporation
- Business plan
- Legal agreements and contracts
- Existing debt schedule, if relevant
- If you have a short business history, financial projections
- A resume that shows relevant business or management experience
An online lender might offer a streamlined application process to get a business loan, with less paperwork and quicker underwriting.
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