If you are a small business entrepreneur, you definitely know this already. Cash flow challenges are not a new thing to any business that is on a growth trajectory. Young businesses might need a loan to cover various expenses such as, purchasing equipment, hiring, payroll, settling supplier invoices, and so forth. When they need to expand, established businesses also approach lenders for small business loans.

However, banks and alternative lenders look at a set of qualification criteria before considering your loan application. They are in business, and wouldn’t want to lose their money at the expense of chasing more. As a business owner, having an understanding of lending criteria gives you an advantage. It helps you to know if taking a loan is a good idea, and if so, which loan options would suit your business needs. Knowing whether or not you qualify for a small business loan will also help you save time and money. 

Without further ado, let us take a look at some of the common qualification factors to apply for a small business loan.

Table of Contents

1. Credit Score 

Depending on the type of small business loan you are seeking, eligibility factors may vary. However, most lenders will check your credit score to determine whether you are creditworthy and can repay a loan. As Ty Kiisel narrates at https://www.nav.com/small-business-loans/, different types of loans may also have different credit score requirements. Therefore, it is important to find out the minimum credit score required by the lender to consider your loan application.

Generally, most lenders prefer borrowers with good or excellent credit scores. If the lender sees how you settle your other debts, they can gauge your payment habits. So, as a business, make sure that you repay your loans promptly as required because the score is essential for getting a good business loan. In addition to influencing approval, other benefits of having a good credit score as a business include the following:

  • Higher loan limits
  • Easy access to cheaper loans
  • You don’t have to provide collateral
  • It’s easier to get business LOC
  • You can get better deals when renting business premises

2. Debt load 

Being a debtor is a healthy thing in business because cash flow and income are essential to keep the business running. When you have a tremendous amount of debt at the time of getting a loan, you may not be in a position to get another when you need it. Lenders do not risk giving you more debt burdens when you cannot handle the ones at hand. Typically, they use the debt service coverage ratio to calculate and see if you can afford the loan. In whatever case, make sure you have all your financial statements in order so you can facilitate slippery transactions.

3. Time in Business 

Lenders are out there to make profits. They are financial experts, so they hate losses even more than you do. This is why most of them will consider how long your business has been operational before approving your loan. A company that has been in existence for twenty years is likely to get a small business loan faster than one that has been in existence for five years. When your business is younger, say less than two years, you could get a loan but the terms and conditions might not be as impressive.

4. Collateral 

There are instances where you need to provide an asset as security for what you have been loaned. Some firms may ask for fixed assets like property, vehicles, or business equipment. These are called secured loans, where the collateral is only claimed when and if the debtor fails to pay for the money. Always be keen about the possible risks before settling on a loan with business collateral.

Qualifications to Apply for Small Business Loans

5. Industry 

When you ask for a loan as a business, the lender assesses the kind of business you handle and the risks involved in your business. What does this mean? Your industry affects your loan eligibility. Some lenders are free-spirited and do not have as many restrictions, but others may not want to lend in sectors that will tarnish their reputation.

For instance, some lenders will not have loan affairs with the entertainment industry for fear of bad PR. The same applies to risky ventures such as firearm businesses. So, before submitting your loan application, make sure you do your research about the industry and the company you are about to get the loan from. It has a significant impact on your interest rates and business growth as well.

Small business loans are essential to entrepreneurs in more than just a few ways. Actually, they go a long way in boosting the economy. Once you know what is required from you by the lender, qualifying for a small business loan becomes a breeze.