Know how: LendEDU’s guide to small business loans
By Dan Rathmanner
They say that death and taxes are the only two things in life that are certain. But if you own your own business, there is one more thing that you can count on – your need of capital.
According to the Small Business and Entrepreneurship Council, up to 97.9 percent of businesses in the U.S. are considered small businesses. This huge proportion has made the small business loan market very competitive and, at times, hard to navigate.
LendEDU created this guide to help clear up the confusion for small-business owners. We have researched and analyzed the multitude of small business loan options, as well as the eligibility requirements, application process, and specific small business loans for certain kinds of owners.
Typical qualification requirements
The qualification requirements necessary to get a loan depend on the type of lender. When it comes to traditional banks and credit unions, expect your loan application to take longer to fill out than with online lenders and for it to be more difficult to get a loan. One of the benefits of using a traditional bank or credit union is that you’re more likely to have access to Small Business Administration (SBA) loans, but they have higher approval criteria on both their SBA and non-SBA loans.
Most banks and credit unions will expect you to have excellent credit and will only lend to you if your credit is above 600 or 700. Online lenders are far more likely to lend to people who have personal credit scores that are below 600. Even online, most lenders expect you to have a credit score of at least 500.
Many lenders have requirements around how long you have been in business with the lowest cutoff often being two years. That excludes many brand-new businesses and startups as lenders are wary of lending to companies without a track record.
Other lenders have requirements about how much revenue your company earns annually that can be as low as $100,000 per year or as high as $2 million or more. Traditional banks are more likely to require a full business plan, but many online lenders also require a business plan to get your loan funded. Almost all lenders require that the business owner personally guarantees a loan unless you have a very strong business credit history, but some will require a lien against your business instead or in addition to your personal guarantee. With SBA loans, everyone who owns at least 20 percent of your company has to provide a personal guarantee.
Number of employees
Some lenders prefer to lend to companies that have a certain minimum number of employees. While this can be as few as two additional employees, it depends on the lender.
To apply for a loan, you need to have your personal information and your business information at hand. You might need to provide access to your accounting software and other software or applications if you’re applying with an online lender like Kabbage.
You may also need to provide a copy of your business license, personal and business bank statements, balance and income statements, personal and business tax returns, a resume of your business experience, financial projections for your company, your drivers license, your business license, and your business plan.
Often with traditional banks you have to fill out a written application, although some allow you to apply online. For some traditional banks and credit unions you’ll also have to go in person and meet with a loan officer.
When you apply with an online lender, the application is often shorter and easier to complete and they require less information, fewer documents, and it takes less time in order to approve your loan. Any documents can be scanned and uploaded. You can often be approved and get the money within a few days rather than the weeks it can take to get approved with a traditional lender.
Improve your chances of approval
There are a lot of things that you can do in order to improve your chances of getting approved for a small business loan. The most important thing is to improve your personal credit score since many lenders use it to decide whether or not to lend to you and they also set your interest rate based on your score.
Building your business credit is another way to improve your chances of approval. You can do this by taking out credit in your business’ name right after you start your business. While you’ll have to co-sign for a business credit card, having one will start the process of establishing your business credit history. You should also start by taking out small loans and building a track record of paying them back.
Create clear business plan
Another way to improve your chances of qualifying for a small business loan is to have a clear business plan and all of your historic and projected financial information available to share with a potential lender. This makes you look professional and allows the lender to better understand your business’ needs and potential.
A good business plan will include things like a description of your company, biographies of the management team, an analysis of your industry, a description of the service or product that you provide, a plan for your operations, your promotional and marketing strategy, and a SWOT analysis of your company’s strengths, weaknesses, opportunities and threats.
Another way to improve your chances of getting approved is to shop around for different loan options. Just because a traditional bank or credit union might turn you down for a loan, that doesn’t mean there are no lenders willing to lend you. While many online lenders are great options, remember that you’ll have to pay a premium in the form of higher interest rates if you have bad credit or if your company is smaller, newer, or for any other reason considered a larger risk.
Dave Rathmanner is the vice president of content for LendEDU, a site dedicated to helping consumers and business owners with their finances. When he’s not working, you can find him playing lacrosse, trying to control his crazy dog, Dewey, or relaxing on the beach.