Taking a loan for your business can come through when you need some money to start the business or even when you want to grow an existing business. You can also use the funds to purchase equipment, hire employees or even pay rent for the space where your company operates. There are different types of business loans that you can get. One of these types of loans is short-term loans which are mostly repaid within 12 months, and the loan takes a shorter time to process after you apply for it. On the other hand, long-term loans are taken to expand an already existing business, and their repayment period is more prolonged and with low interest rates.
Another type of loan you can get for your business is a secured loan where the lender will require collateral. The collateral can be in the form of property, valuable assets, or even vehicles. Unsecured loans do not require security, but they come with high interest rates, and they also require higher credit scores. Equipment financing, merchant cash advances, and SBA loans are other types of business loans that you can get. This article will take you through the process of qualifying for a small business loan.
1. Build Your Credit Score
A credit score refers to a numerical value that indicates your creditworthiness. Lenders use the credit score to assess your ability to repay debts like mortgages, credit cards, or other loans. Most lenders use FICO scores that range from 300 to 850. The higher your credit score, the better your chances to qualify for a small business loan. You can improve your credit score by paying your bills fully and on time and disputing any inaccurate information on your credit report.
Different lenders have different credit score requirements.
Government-backed loans and those given by traditional banks may be strict on an excellent credit score, while most online lenders do not pay much attention to credit score. Most online lenders are more concerned with the cash flow in your business and the track record of the company.
2. Gather Your Financial and Legal Documents
When applying for a government or traditional lender, these institutions will require you to provide some documents. Some of the documents you may need include your personal and business tax returns, personal and business bank statements, and your business license. Other necessary documents may consist of a photo of your driving license, a resume of your business management experience and financial projections, articles of incorporation, and commercial leases. However, not all lenders will ask for such documents before giving out loans.
3. Know the Requirements of the Lenders
Different lenders have different requirements and conditions for giving loans. Some of these requirements include a good credit score, your annual income, bank statements, and the years you have been in business. However, some lenders may be lenient on these terms and still give you a loan even if you do not meet every condition that they provide for their loans.
It mostly happens when you have underperformed in one requirement and over-performed in another area. You can get matched with small business loan options to get approved for the loan you are seeking. It will lower your hustle of looking for multiple lenders and getting disappointed when your loan request is not accepted.
4. Have a Compelling Business Plan
Lenders will require proof to show how you plan to spend the money they give you. Having a solid business plan with details of how you plan to spend the money to make profits will provide lenders with confidence in your ability to repay the loan. A good business plan contains a description of your business and the products and services that you offer, current and projected financials, SWOT analysis, your management team, and operations strategy. Having a well-prepared business plan raises your chances of the lenders approving your loan.
5. Providing Collateral
If you are applying for a secured loan, you will require collateral to back the loan. There is different collateral that you can offer, like property and other assets, and lenders will seize your collateral if you fail to repay your loan. Collateral is a way to assure lenders that they will recover their money in full. However, some lenders do not ask for collateral, but they may ask for a personal guarantee or take a blanket lien on your business assets.
In summary, you may get a business loan to launch your business or to expand it. There are different types of loans that you can get, including short-term loans, long-term loans, secured and unsecured loans, or even equipment financing. To qualify for a small business loan, you need to build your credit score and gather your financial and legal documents such as business licenses, bank statements, and income tax returns. Lenders also require a solid business plan that shows how you plan to use the money before giving you a loan. Some lenders may also require you to provide collateral before qualifying for a loan.
