How to Qualify For a Business Loan – 7 Essential Factors
Let’s Explore the essential steps on how to qualify for a business loan. In this article we will discuss about requirements, necessary documentation, and tips for increasing your chances of approval.
Business Loans
01
- Top Ranked Choice
5
Business Loans
02
Business Loans
03
Business Loans
04
Business Loans
05
- Top Ranked Choice
5
Average Review
Business Loans
- Check Your Eligibility
- Equal Housing Opportunity
- 24/7 Support
5
Average Review
Business Loans
- Provides data-driven financial solutions
- Loan amount: $15K - $1M
- Time in business: 12+ months
- $12.5K in monthly revenue
- Minimum credit score: 600
5
Average Review
Business Loans
- Check Your Eligibility
- D&B Receivables Intelligence
- 24/7 Support
Getting a business loan no matter what the purpose of the loan is, whether to cover business expenses or inventory purchase can help you in difficult financial conditions and to improve your cash flow. But each lender has its own rules and regulations.
How to qualify for a business loan
Here are some common business loan requirements you should keep in mind and prepare for them while applying for a business loan. These listed requirements will definitely cover the topic of how to qualify for a business loan.
1. Business and Personal Credit Score
A lender typically has a thorough look on the personal as well as the business credit score after you submit a loan application. Bad Credit scores can reduce your chances of approval while on the other hand if you possess a good credit score, this is how to qualify for a business loan with low interest rates and APRs.
Which Credit scores are considered as the good or bad score? Considering scores as good or bad varies according to the scoring model used by the lender and its guidelines. One of the well known and widely used credit scoring models -FICO- has credit scores ranging from 300 to 850. According to this model the scores below 580 are considered as bad, while above 670 is considered as a good credit score. The range of 90 scores between 580 and 670 is considered as average.
2. Annual Business Revenue and Profit
Usually, lenders have a minimum limit for annual revenue of the business favoring the statement How to qualify for a business loan. Some have minimum monthly business revenue requirements. You have to submit your bank statements and income tax documents to the lenders so that they can assess your business’ annual revenue. You can manually upload or submit by hand to the lender or allow the lender to connect your bank account and analyze your statements if service is available.
Additionally, some lenders may require your profit and loss statements to determine whether your cash flow can afford your loan plan or not.
3. Time In Business
Second step favoring the topic of How to qualify for a business loan is time in business. Businesses with a strong track record and large lifetime have more chances of loan approval as compared to new businesses. But the minimum lifetime or time in business requirements may vary from lender to lender and with the type of the loan. Lenders associated with traditional banks usually have minimum time in business requirements for 2 years while online lenders can approve your loan if your business is running for the past 6 months or 1 year.
Time requirements also vary from type to type of business loan. For Example, In case of invoice factoring, which includes selling unpaid invoices, minimum time in business requirement is about three months.
4. Debt-to-income Ratio
Some lenders offer a unique type of requirement “Debt to income ratio (DTI)” to assess whether you can afford an additional loan or not. Your DTI ratio means the ratio of your monthly debt against your monthly gross income.
The greater DTI ratio means that your debt is greater than your income. Higher DTI ratio reduces the chances of loan approval. While minimum DTI ratio requirements vary from lender to lender, it is recommended to keep it below 43% for fast loan approval.
5. Collateral For Secured Loans
Both secured business loans and unsecured business loans are offered by lenders. In case you apply for a secured business loan, lenders may ask you to provide a collateral- something of greater value than the loan amount- that they can keep if you fail to repay your loan.
The collateral requirements vary from type to type in case of business loans. For example if you take a loan to purchase a business asset, the asset itself will be the collateral for that loan. So that if you fail to repay the loan the lender can keep the equipment.
Additionally, some lenders require a personal guarantee, which means that the lender can have access to your personal assets in case you fail to repay the loan. Some personal loans also need collateral for approval.
6. Business Plan
Last but not least factor in How to qualify for a business loan is time in business. Some of the lenders have a requirement to share the business plan, more probably if you own a new business. It helps them to assess your goals and dedication to the work. A business plan includes:
- Financial projections
- Purpose of using the funds
- Industry outlook
- Competitive analysis
7. Documents Needed for a Business Loan
Before applying for a business loan, try gathering the required documents to get approved for a loan. Here is the list of some common requirements most lenders ask for to get loan approval:
- Bank statements
- Personal and business tax returns
- Business permits and licenses
- Employee Identification Number (EIN)
- Collateral proof
- Balance sheet
- Your commercial lease duplicate
- Disclosure of other debt
- Accounts payable and accounts receivable aging
- Ownership and affiliations
- Legal contracts and agreements
- Your driver’s license
- Business insurance plans
- Payroll records
- Incorporation documents
- Business plan
Common Mistakes in Business Loan Applications
According to the survey conducted in 2019, one-third of the applications are rejected. Some loans lead from natural denial while most loan applications are rejected as these applications commit these mistakes.
- Waiting until the last minute to find best interest rates
- Filling out the application forms incorrectly or cutting and refilling of forms
- Not having a precise and clear loan utilization plan
- Making big changes in business before applying for a loan
Business Loans
01
- Top Ranked Choice
5
Business Loans
02
Business Loans
03
Business Loans
04
Business Loans
05
- Top Ranked Choice
5
Average Review
Business Loans
- Check Your Eligibility
- Equal Housing Opportunity
- 24/7 Support
5
Average Review
Business Loans
- Provides data-driven financial solutions
- Loan amount: $15K - $1M
- Time in business: 12+ months
- $12.5K in monthly revenue
- Minimum credit score: 600
5
Average Review
Business Loans
- Check Your Eligibility
- D&B Receivables Intelligence
- 24/7 Support
As a business owner, you are busy. Don’t waste time in finding the ultimate perfect interest rates. Fill the application forms professionally and prepare a concise and effective loan utilization plan. Make sure to have a look on these requirements in order to make the article How to qualify for a business loan beneficial.
