As a small business owner, or someone considering starting your own business, you may be wondering how to qualify for a small business loan. Lenders have tightened their approval process, making it more difficult for small businesses to qualify for a loan, but you can improve your chances by preparing to meet their requirements, standards, and having appropriate documentation.
How to Qualify for a Small Business Loan
Applying for a small business loan takes preparation, a sound business model, and quite often, other intangibles. Here is some more information about small business loan requirements and other factors which may affect your application or ability to get a small business loan.
Preparing Required Documentation
The US Small Business Administration suggests the following information and documentation must be available when applying for a small business loan. Before you visit the bank to apply, take time to gather all required documents from this list to improve your chances of approval:
- Statement of Personal History
- Personal Financial Statements
- Business Balance Sheet
- Current Profit and Loss Statements
- Supplementary Financial Statements for previous 3 years
- Projected Financial Statements for the next year’s income
- Business Licenses and Certificates (corporations need corporate stamp or seal)
- Previous Loan Application History
- Business Income Tax Returns for previous three years
- Personal Tax Returns for previous three years
- Business Overview and History (similar to what would be included in a business plan)
- Business Leases, Rentals, Property information
- Your Resume
- Small Business Loan Application from the lender of your choice
Other Factors Affecting Small Business Loan Applications
Lenders don’t just want to see a few papers neatly bound in a notebook – they want to verify you are really qualified. Keep these factors in mind as well:
Credit score. Just as your personal credit history and score plays an important role in whether or not you will get approved for credit, your personal credit history will be considered when applying for a business loan. Ideally, you will want a credit score in the 700 range, and the higher your score, the better your chances for approval. (see “What is a good credit score” for more information about credit score ranges).
Experience. Lenders also want to see that your experience relates to the industry of the business you are starting or buying. If you don’t have direct experience in the industry, you’ll want to hire someone who does for your management team, and include this resume and information in your documentation.
Viability. Do you have a sound business plan or business model? you may think your product is the best thing since sliced bread, but you may have a difficult time convincing lenders unless you are bringing a proven product or business model to the table.
Put yourself in your lenders shoes for a moment. Would you lend money to you or your business? Lenders need to see that you have adequate funds to repay the money they let you borrow, so try to get money saved or build up your portfolio of business assets. An extremely high percentage of newly started businesses will fail within their first three years of operation and lenders are well aware of these risks. Help reduce your risk level by doing all you can to make yourself and your business credit worthy before applying for a small business loan.