Starting a new company is exciting. And each year, more than 627,000 new businesses open their doors to customers and clients.
No matter what industry those businesses are in, they all have one thing in common: they need money to start making money.
Small business loans are a great option and give you the funding you need to take your brand to the next level. But applying for loans can feel daunting, especially when you’re first starting a company.
The sooner you understand how to qualify for a business loan, the faster your application will get processed. And the faster you’ll get the money you need to make an impact.
Here’s what you need to know.
Know How Much You Need
Before you can qualify for any small business loan, you need to decide how much you want to borrow. This isn’t always cut and dry.
Start by identifying how you’ll use the loan. Are you looking to buy new equipment or do you need the funds to buy a building?
Remember, it’s often easier to qualify for a smaller loan when you’re first starting out. Further, some lenders have restrictions on how you can use the money.
Make sure you’re applying for the right type of business loan. You can always supplement a smaller Small Business Authority (SBA) loan with a personal loan to cover expenses not approved under your loan terms.
Look at the Minimum Loan Requirements
Every lender is different and this means they’ll have different minimum qualification requirements.
Before you apply, take the time to find out what you need to get the loan. For some lenders, this will be a minimum credit score. For others, your annual revenue and profits are more important.
If you don’t meet the minimum requirements, the lender won’t offer you a loan. So, spare yourself the frustration of a rejected application. Only apply if you meet the minimum requirements.
Keep in mind that meeting the minimum requirements won’t guarantee you the loan. It means they’ll consider your application.
Beware Industry Exclusions
Some lenders refuse to loan money to businesses in certain industries. This varies from lender to lender.
Do your research. Make sure your business doesn’t operate in an industry excluded from traditional SBA loans before you apply. If you’re excluded, look for alternative lenders.
Understand Your Credit Scores
Every lender looks at your credit score before making a decision on the application. The higher your credit score, the better interest rate you’ll qualify for. Visit this loan page to get an idea of the type of interest rate you’ll qualify for.
But there’s more to business loans than your personal credit score.
They’ll also check your business’s credit score. Credit bureaus calculate this score based on how long you’ve been in business, your annual revenue, and your existing business debt.
Most banks use both to determine whether to lend you money. And you can always build your score up.
If lenders haven’t approved your application, start looking at your personal debt. Pay down credit card balances and start chipping away at personal loans which could impact your credit score.
Keep running your business—the longer you’re in operation and the more money you bring in, the better your business credit score will be.
Work on Your Business Plan
When you’re first starting out, banks and lenders won’t have your business history to judge your application by. But they can always use a business plan to gauge your loan-worthiness. If you have a solid plan, they’ll feel more confident in loaning you the money.
If you haven’t already, write down your business plan and explain exactly how you’ll use the money to grow your company. And the more they know about your company, the better.
Describe your business as you would to a potential investor. Put together your estimated revenue for the upcoming year, your marketing strategy to show intended growth, and explain your company’s strengths and weaknesses.
Lenders consider each loan as a type of investment in your business. They need to understand how your company performs before they can make a good business decision.
Have Collateral Ready
Most businesses applying for loans (especially brand new operations) will need collateral to back the loan itself. This secures the lender’s interest.
If you default on the loan, the bank or lender takes possession of the collateral and can sell it to settle your debt.
Don’t panic…they’ll only take possession if you can’t repay the loan. As long as you make payments on time every time, you’ll be in the clear.
What Counts as Collateral?
Collateral can be anything from business equipment to the building itself. It all depends on what the lender requests, the industry you work in, and the amount you’re hoping to borrow.
The larger the loan amount, the more valuable the collateral needs to be. If you’re not sure what you’ll need, ask your lender. They’ll give you an idea of what they’ll accept.
Complete the Application
Believe it or not, many businesses end up submitting incomplete applications. This is the easiest way to guarantee that your application isn’t approved.
Before submitting your information, double check everything. Make sure your contact information, financials, and any other data get entered correctly. Include all supplemental materials (financial statements, credit reports, etc.) in the format requested by the lender.
Once you’re done, submit the application and wait for their decision.
Final Thoughts on How to Qualify for a Business Loan
As a business owner, you’ll need to apply for a loan eventually. And it’s natural to wonder how to qualify for a business loan in the first place.
But the truth is, it’s easier than you think. As long as you take the time to go through your application and include as much information about your business as possible, you’ll be fine.
You might not qualify for the first loan you apply for, but there will be an option out there for your company.
Be sure to check out our latest posts for more information on how to grow your company and increase the money you have on hand.