How to Qualify for a Small Business Loan in 8 Steps
By: Kate Samano September 24, 2021Small businesses commonly need capital at some point during their operations. Additional funds might be required to expand operations during a growth period or to address limited cash flow during a low season.
Approximately 29% of businesses fail because they run out of capital. Ultimately, by the time most small business owners realize they need cash, they need it quickly. This means that there isn’t a lot of time to waste applying for and being denied loans.Â
Qualifying for a small business loan to obtain extra capital is possible, and to do so, you must set yourself up for success. Understanding how to qualify for a small business loan will give you a better understanding of your chances of being approved for a loan. Get fully prepared, so you can make the evaluation process as easy as possible for the lender.Â
Related: 5 Ways to Increase Your Chances of Securing a Loan
Here are eight necessary steps on how to qualify for a small business loan:
1. Determine How Much You Need
The next step is to determine what kind of small business loan you need. There are many different types of loans and the qualification requirements, repayment terms and interest rates can vary, among others.Â
Some of the small business loan options you might consider are:
- Business credit cards
- Business line of credit
- SBA loan
- Personal loan
- Merchant cash advance
- Loans from friends and family
- Crowdfunding
- Peer lending
- Working capital
- Vendor financing
Each of these sources of financing has its positives and drawbacks. For example, a business credit card might be easy to qualify for, but it could also come with a very high interest rate. Alternatively, crowdfunding can get your business money that you don’t have to pay back — but it can be quite challenging to crowdfund successfully.Â
Knowing how much you need to borrow can dictate what type of loan you opt for. If you need a small amount of financing, a business credit card might be the right solution. However, if you need a significant amount of money, a business line of credit or an SBA or personal line might be a better idea.Â
Take the time to evaluate all the options carefully, and decide which one fits your needs best. Look at what type of loan you have the best chance for qualifying for, and consider whether the repayment terms seem manageable to you. Â
2. Determine What Kind of Loan You Need
The next step is to determine what kind of small business loan you need. There are many different types of loans and the qualification requirements, repayment terms and interest rates can vary, among others.Â
Some of the small business loan options you might consider are:
- Business credit cards
- Business line of credit
- SBA loan
- Personal loan
- Merchant cash advance
- Loans from friends and family
- Crowdfunding
- Peer lending
- Working capital
- Vendor financing
Each of these sources of financing has its positives and drawbacks. For example, a business credit card might be easy to qualify for, but it could also come with a very high interest rate. Alternatively, crowdfunding can get your business money that you don’t have to pay back — but it can be quite challenging to crowdfund successfully.Â
Knowing how much you need to borrow can dictate what type of loan you opt for. If you need a small amount of financing, a business credit card might be the right solution. However, if you need a significant amount of money, a business line of credit or an SBA or personal line might be a better idea.Â
Take the time to evaluate all the options carefully, and decide which one fits your needs best. Look at what type of loan you have the best chance for qualifying for, and consider whether the repayment terms seem manageable to you. Â
3. Understand Eligibility Requirements
Now that you know how much you need and what type of loan you want, it’s time to focus on eligibility requirements. Before you apply for a loan, make sure you meet the minimum qualifications. For example, many small business loans only consider applicants who have been in operation for at least two years. If you’re a fairly new business, you might want to seek new business loans, which are also known as startup business loans.Â
Some other standard minimum eligibility requirements include:
- A minimum personal or business credit score
- A minimum amount in annual revenue (often ranging from $50,000-$250,000 per year)
- Meeting the criteria for a small business (SBA loans require this)Â
- A healthy debt-to-income ratio (many lenders want to see a ratio that is less than 1.35 with the inclusion of the loan you want to take out)
4. Review Your Credit
Before you consider applying for any type of small business loan, review both your personal and business credit score. A lender typically wants to see a business score of 80 or higher or a personal credit score of 720 or higher. This indicates a low-risk borrower who has a track record of paying lenders responsibly.Â
If your credit scores aren’t up to par, review your credit report. More than one in three Americans have a mistake on their credit report. A false or inaccurate negative item on your credit report could be unnecessarily pulling your score down and risking your chance for loan approval. Review your credit report for errors, and if you find any, file a dispute with the credit bureaus. You can work with a credit repair specialist if you don’t have the time to dedicate to this process.Â
You can also take steps to improve your credit, such as making payments on time, reducing your credit utilization ratio and diversifying your credit mix.Â
If your credit is low, it’s important to understand that a traditional lender may not be as likely to approve you for a loan. In this case, you should have a plan to balance out the low credit score (see step six) or find less traditional lenders that are willing to work with low-credit borrowers (see step seven).Â
5. Create a Business Plan
Almost all business loan applications will require that you submit a business plan. This business plan is an opportunity for you to show a lender that you have a profitable business with a competitive advantage, know the market, know how much money you need and have a plan for the money.Â
Your business plan will need to include:
- An executive summary
- Company description
- Description of the goods or services offered
- List of the management team and total hired staff
- Target market
- Industry analysis (competitive analysis)
- Profit and loss statementsÂ
- Balance sheet
- Cash flow sheet
- Accounts receivable data
- Articles of incorporation
- Promotional, marketing and sales strategy
- SWOT analysis
- Funding requirements and plans for the funds
It takes a lot of work to put a business plan together, but it’s your first opportunity to show your lender that you have a cohesive strategy for the company.Â
The two most important things about the business plan are the executive summary and the supporting financial documents. The executive summary will be the first thing the evaluator reads, so you’ll want to impress them immediately to reduce the chances of getting denied. You also want to double-check that you’ve included all the relevant financial and legal documents for the lender, so they don’t have to come back to you and ask. Try to put yourself in their shoes and anticipate their needs. If you were evaluating an applicant, what would you want to see?
Your business plan should cohesively give your lender everything they need to know about the company so they can make an informed decision about your application.Â
6. Be Prepared to Talk About Collateral
If there are steps in this process that make you question whether you’ll be approved for a loan, don’t worry yet. In particular, people with poor credit or brand new businesses may find they don’t meet some standard requirements. One way small business owners can balance the scales is by offering collateral. Collateral can be the equipment from your business, your business property or even your home. Ultimately, collateral is any valuable asset that you own and can put on the line to reduce the risk to the lender.Â
While acquiring an unsecured loan might be preferred for most people, offering collateral is an excellent backup option if you find that lenders are rejecting you.Â
7. Have a Payback Plan Prepared
When evaluating your application, your lender will analyze whether you can afford payments on your loan. While they’ll take this step regardless, it can be powerful to show that you’ve also made a payback plan.Â
A payback plan is beneficial for both parties. It allows you to verify that taking on this loan will be manageable for you. If you crunch the numbers and don’t think you can afford payments, you might need to reexamine the amount of money you’re requesting. A payback plan shows your lender that you have a plan in place and intend to make payments when they’re due.Â
This is a small step that can really impress your lenders. Include this payment plan in your business plan, so they can review it themselves.Â
8. Meet With the Experts Before Applying
At this point, you may feel that you’re ready to start applying for loans. However, we strongly encourage you to take note of this final step. Before you even start applying, take the time to sit down with lending experts. Every time you apply for a loan, the potential lender makes a hard inquiry into your credit. If you have too many hard inquiries within a short period of time, your credit score will take a significant nosedive, which will only hurt your chances of approval even more.Â
You’ve done all this hard work preparing for your loan application — now let the specialists review it. Lendzi can help confirm you’re asking for the right amount and help you find the right lender for your situation. After discussing your business needs and goals with you, Lendzi will take on evaluating the best lenders. We’ll examine each lender’s loan terms and APR to find the best possible offer out there. Our loan specialists can also offer recommendations on which type of business loan might be the best fit for you.Â
Don’t worry if you’re battling poor credit or you’re a brand new business; Lendzi specializes in helping all types of small business owners acquire the capital they need.Â
A great small business owner knows they can’t do it all themselves. Sometimes the wisest decision you can make for your business is to outsource to the subject matter experts. The same logic applies for financing — why not let those who do this for a living help you get the best loan possible?
Getting a Small Business Loan With Lendzi
Lendzi is an expert advisor in helping small business owners learn how to qualify for a small business loan and find the right one for their needs. With one application to Lendzi, you automatically get access to dozens of lenders. Lendzi partners with traditional and alternative lending options to help small business owners get the help they need. Submit an application today and get funding in as little as 24 hours after approval!Â
About the Author
Kate Samano
Kate Samano is a copywriter and Head of Content at Lendzi. She believes in helping small businesses grow by providing access to viable financial advice.