What to Know When You Need a Business Loan
Lenders, whether they’re a traditional bank or a non-institutional entity, generally have a common goal when it comes to financing: get repaid. While this endgame is the same across the board, the methods used to approve borrowers vary.
Some lenders care more about your monthly revenues and less about your creditworthiness or length of time in business, while others require you to have good credit and be in business for at least two years. Regardless of the criteria, there are some common things that factor into all lenders’ decision to approve or deny a loan application. Below are are few of them.
Credit check. Lenders will consider your personal and business credit score when determining your eligibility for a loan or line of credit. Request copies of your personal credit report from the three major reporting bureaus — Equifax, Experian and TransUnion — and check it to see what’s on there. Trust us; if you don’t check it, the lenders will. Dispute any inaccuracies, make arrangements to pay off old debts still actively showing on your report, and make timely payments on your open accounts. Check your credit score and talk with a credit counselor or an adviser at a U.S. Small Business Administration or Small Business Development Center local office to discuss ways you can increase it if it’s below the lender’s required number. FICO Small Business Scoring Service (SBSS), Dun & Bradstreet PAYDEX and Intelliscore PlusSM from Experian are the three most common business credit reporting and scoring agencies.
The FICO SBSS ranges from 0 to 300 and is based on your personal and business credit history along with other financial information such as your business’s age, number of employees and financial data. The Dun & Bradstreet PAYDEX score ranges from 0 to 100 and is based on how promptly you’ve paid your bills in the past. Intelliscore Plus score ranges from 0 to 100 and predicts the likelihood of serious delinquency in the next 12 months.
Industry. Lenders want to know that you have experience working in the industry that your business is rooted. They also want to know whether your company’s industry is viable and profitable so you can repay your loan.
Time in business. Experience truly is the best teacher, which is why financial institutions prefer to lend to established businesses than startups. There is financing available for newer businesses, but companies with two or more years of revenue earnings are generally preferred.
Business plan. What are your company’s goals? Will they lead to profitability? More importantly, will they ensure your ability to repay the loan? These are the things lenders will want to know and look for in your business plan. They want to ensure you have a good understanding of how the borrowed money will be spent. Make sure your plan is solid and detailed.
Business debts. Lenders want to know if your business owes money, and if so, they’ll request a detailed list of all of debts such as loans, leases and contracts.
Industry code. This is a small thing, but, depending on the lender, it could lead to your loan being rejected if incorrect. Selecting a six-digit North American Industry Classification System (NAICS) or four-digit Standard Industrial Classification (SIC) code based on your company’s industry lets lenders, creditors and vendors know what industry your business belongs in. Go to www.naics.com and www.siccode.com to do a single-keyword search such as “manufacturing” or “consulting” to select the appropriate code for your business.
Common documents required when you need a business loan
Though each lender has its own requirements for obtaining funding, there are documents that are standard requirements across the board. Below is a list of items applicants generally need to submit with their application for a business loan.
- Business financial statements
- Personal financial statements
- Business federal tax returns
- Personal federal tax returns
- Business plan
- Tax ID number
- Business overview and history
- Business lease/mortgage statement
- Business license/certificate
Why startups need business loans
Startup businesses tend to need financing to get off of the ground. An owner’s self-funding and borrowing from family and friends may help cover some costs, but new businesses need funds to grow and expand. Lenders see startups as risky investments because they don’t have a profitability track record, such as veteran establishments, and thus often fail. That’s why loans for businesses that are less than a year or six months old are scarce.
SBA-backed loans are probably a startup’s best bet. The SBA sets guidelines and guarantees loans made by its partnering lenders. These loans are favorable because they have reasonable interest rates and longer loan terms. But qualifying for an SBA loan can be difficult. For starters, your business has to be for-profit, meet the SBA’s size standards, do business in the United States and has to have exhausted all other options for financing. The process of gathering the required items can also be time-consuming. See the list of what you need below:
- Very detailed business plan
- Amount of funding you need
- Purpose of funds
- Your credit history
- Financial projections
- Available collateral
If you need a business loan for expansion
Business expansion loans are great for borrowers who want to hire new employees, relocate to a larger space or purchase more inventory, but don’t have the capital on hand to do it. Some lenders designate loans specifically for expansion while others have products such as lines of credit and other loans that could be used for similar purposes.
Traditional banks offer business expansion loans, including those that are SBA lending partners. The SBA has a couple of options that qualifying borrowers can apply for. Visit www.sba.gov for more information.
Credibly offers a business expansion loan that you should consider if you have bad credit. To qualify, you need a FICO score of 600 or higher, must be in business for at least three years, have an average monthly bank deposit of at least $15,000 and have average daily balances of $3,000. The documentation you’ll need includes:
- Signed business loan agreement
- Business mortgage statement if you own; business lease agreement if you rent
- Unexpired government-issued picture ID for all owners
- Bank statements from the last three months
- For loans over $100,000, your most recent business tax return
If you need a business loan without collateral
Who wouldn’t want to borrow money without having to put anything down? Collateral-free loans are very attractive, especially to small shops that find that funds are usually spent on operating costs. The truth is that there aren’t many options when it comes to collateral-free small business loans from traditional sources like banks.
Fintech firms like Kabbage and Credibly offer collateral-free lending to small businesses, but they have shorter terms (six to 18 months) and can be expensive. Poor and fair credit applicants are welcome to apply as long as they can show that their business makes money consistently. If all goes well, online business lenders can get you approved for an unsecured loan in less than 48 hours.
If you need a business loan fast
Businesses have their ups and downs, and if your business has slowed for any particular reason, chances are money is or will become tight. There are a couple of options for business owners who need access to funds to pay inventory, cover rent or payroll.
Hard money business loans are collateral-backed loans that are available regardless of your creditworthiness or time in business. These loans are usually secured by real estate, such as a commercial property, residential property or land. Beware: they often come with higher interest rates and a quick repayment schedule.
There are other alternative lenders that offer quick financing and will overlook a low FICO score or startup status. These lenders can approve you online or over the phone for a loan or lines of credit in as little as 24 hours. But these products come with high interest rates, quick repayment terms and, depending on the lender, often require your business to make a minimum range of $4,200 to $15,000 a month. Below is a list of items these lenders generally require:
- Government-issued picture ID for all business owners
- Bank statements from the last three months
- Most recent business tax return
- Business information (name, address and details about the business)
- Tax ID number
- Social Security number
If you need a business loan with SBA guaranty
If you’ve run into roadblocks trying to obtain funding from other lenders and you have a decent credit score, then an SBA-backed loan may be your best bet. SBA loans are a good option for entrepreneurs because they offer lower interest rates and longer repayment terms than most lenders. These loans range from $500 up to $5.5 million. Gathering the required paperwork for these loans can be time-consuming, and these loans require you put down 10 to 20 percent of the loan’s value.
The SBA offers various loan programs for small business owners. Its 7(a) program is the agency’s primary program that provides financial assistance to small businesses and has nine different programs — Standard 7(a), 7(a) Small Loan, SBA Express, Export Express Loan, Export Working Capital Loan, International Trade Loan, Preferred Lenders, Veterans Advantage and CAPLines. Contact an SBA lender partner to see if you qualify. Getting quick approval from the SBA side means you will need to submit the following:
- All SBA forms
- Personal financial statement from anyone who owns more than 20 percent of the business
- Business financial statement
- Year-end profit and loss (P&L) statement for the last three years
- Year-end balance sheet for the last three years, including a detailed debt schedule
- Reconciliation of net worth
- Interim balance sheet
- Interim profit and loss statements
- Projected financial statements that includes month-to-month cash flow projections, for at least a one-year period
- Business certificate/license
- Loan application history
- Income tax returns for past three years
- Business overview and history
- Credit history
- Business lease
- Financial projections
- Well-thought-out business plan with projections
Additional documents (if purchasing an existing business)
- Current balance sheet and P&L statement of business to be purchased
- Previous three years’ worth of federal income tax returns of the business to be purchased
- Proposed bill of sale including terms of sale
- Asking price with schedule of inventory, machinery and equipment, furniture and fixtures
- Franchise, jobber or licensing agreements
- Proof of equity injection
- Additional SBA forms may be required based on the specific use of proceeds or fees paid by the applicant to a loans package, broker or agent
If you need a business loan for equipment
Businesses owners will seek a loan for equipment when they need to buy, replace or repair machinery essential to their company’s operation. You have to determine whether it’s better for you to get an equipment lease or loan. An equipment lease is essentially a rental agreement, whereas a loan helps you to purchase the equipment and will often require collateral. Each lender has its own terms when it comes to the equipment loans offered.
Some lenders, like Capital One, offer equipment and vehicle loans with fixed monthly payments that allow you to buy, replace or refinance equipment. Some qualified buyers may be get up to 100 percent financing. This also requires your business to have operated at least two years. If you’re seeking more than $50,000 in financing, Capital One requires you submit three years’ worth of personal and business tax returns, current financial statements and projections and personal financial statements to apply. TIAA Bank offers loans and revolving lines of credit that could be used for equipment financing.
If you need a business loan for cash flow
While there are loans available to help you cover daily business operations, buy equipment and pay employees, a business line of credit allows you to withdraw money from a set amount when you need it instead of receiving an upfront lump sum. You won’t be charged interest or be required to make any payments until you draw from the line of credit. Lines of credit can be secured or unsecured, and you aren’t required to use the full amount of available funds.
Another option is a merchant cash advance (MCA) where lenders advance you funds in exchange for a percentage of your future receivables. So you’d repay the lender a daily amount based on your sales, with the total amount that’s repaid increasing and decreasing, depending on your sales. The requirements for a line of credit and MCA vary by lender, but here are some general items they require:
- Tax ID or merchant account number
- Annual business revenue
- Annual credit and debit card sales
- Credit card processor name and number
- Business bank account details
The bottom line
When it comes to applying for small business loans there’s one thing to keep in mind: stay ready so you don’t have to get ready. Lenders may have different criteria for approving business loans, but it’s better to be prepared with some of the basic items most lenders require than be caught having to scramble.
Just about all lenders, including those who approve applicants with bad credit, will check your credit report to see what type of borrower you are. Therefore, you should check your credit report and take steps to clean it up before you even complete an application. Doing so will bring you closer to getting approved for a lending product with decent terms. The same could be said about having a solid business plan. Lenders want to know that you have goals to help your company maintain and grow its revenue. A detailed business plan will help them see this.
Feeling a bit overwhelmed? The U.S. Small Business Administration and the Small Business Development Center has offices around the country that offer free counseling to business owners like yourself. This counseling also includes business coaching and help creating a business plan. Visit sba.gov or www.sba.gov/tools/local-assistance/sbdc for more information.