Business loan

How to qualify for a small business loan in 5 steps

Getting a small business loan can be a time consuming process. By knowing in advance if you meet a lender’s qualifications, you can avoid potential frustration.

Here are five steps to help you qualify for a small business loan.

We’ll start with a short questionnaire to better understand your unique business needs.

Once we discover your personalized matches, our team will consult with you on the process to follow.

1. Build personal and professional credit scores

Personal credit scores indicate your ability to pay off personal debts, such as credit cards, car loans, and mortgages. Small business lenders require a personal credit score because they want to see how you manage your debts.

FICO scores, commonly used in loan decisions, range from 300 to 850 (the higher the better). You can get a free credit score from NerdWallet and a free copy of your credit reports from AnnualCreditReport.com.
More established companies will have corporate credit scores (which usually range from 0 or 1 to 100) with credit bureaus such as Experian, Equifax and Dun & Bradstreet. Steps to establishing business credit include establishing business lines and maintaining clean public records.
You will likely need excellent business credit and good personal credit to qualify for a government-backed SBA loan or a traditional small business bank loan. Online lenders may be more lenient with credit scores, emphasizing cash flow and your business track record instead.

2. Know the lender’s qualifications and minimum requirements

You will generally need to meet minimum criteria regarding credit scores, annual income, and years in business to qualify for a business loan, although some lenders may be flexible if you underperform in one area but outperform in another. other.

  • For loans guaranteed by the US Small Business Administration: Your business must meet the SBA’s definition of a “small” business, operate as a for-profit business, and cannot be an ineligible business, such as life insurance companies and financial businesses such as banks . You must also be current on all government loans with no past defaults – you’ll be disqualified if you’ve been late on a federal student loan or government-backed mortgage, for example.

  • For online banking and business loans. Banks and online lenders generally underwrite loans based on traditional factors, but online loans come with less stringent requirements. For example, some online lenders offer loans to businesses with bad credit or may approve businesses that have not been in business for that long. On the other hand, this qualification facility generally comes with a more expensive loan.

3. Gather financial and legal documents

Banks and other traditional lenders typically require a wide range of documents when applying for a small business loan. Financial and legal documents you may need for a small business loan include:
  • Personal and corporate income tax returns.

  • Balance sheet and income statement.

  • Personal and business bank statements.

  • A photo of your driver’s license.

  • Commercial leases.

  • Commercial licenses.

  • Articles of incorporation.

  • A resume that shows relevant management or business experience.

  • Financial projections if you have a limited operating history.

Online lenders can provide a simplified application process with fewer documents and faster underwriting. If you have good credit and strong business finances, some online lenders may offer you rates comparable to bank loans.

When getting a business loan, be sure to compare options to find the cheapest loan that meets your business needs.

4. Develop a solid business plan

Lenders will want to know how you plan to use the money and see that you have strong repayment capacity. They may need a solid business plan that details the purpose of the loan and how you expect it to increase profits.

Your business plan should also include the following:

  • Company Description.

  • Description of the product and/or service.

  • Management team.

  • Industry analysis.

  • Plan of facilities and operations.

  • Current and projected finances.

  • Promotional, marketing and sales strategy.

  • SWOT analysis (strengths, weaknesses, opportunities, threats).

Your business plan should clearly demonstrate that you will have enough cash to cover ongoing business expenses and new loan repayments. This can give the lender more confidence in your business, increasing your chances of getting loan approval.

Use NerdWallet’s business loan calculator to estimate your monthly payments:

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5. Provide guarantees

To qualify for a small business loan, you may need to provide collateral to secure the loan. Commercial collateral is an asset, such as equipment, real estate, or inventory, that can be seized and sold by the lender if you cannot make your payments. It’s a way for lenders to get their money back if your business goes bankrupt.

For example, SBA 7(a) loans over $25,000 require collateral, plus a personal guarantee from each owner of 20% or more of the business. A personal guarantee puts your credit score and your personal assets at stake.

Some online lenders do not require collateral, but may want a personal guarantee. Others may also take a general lien on your business assets – essentially another form of security – giving the lender the right to take business assets (real estate, inventory, equipment) to recover an unpaid loan. Each lender has their own rules, so ask questions if you’re not sure what’s required.

If you don’t have collateral to get a loan or don’t want to risk losing personal or business assets, unsecured business loans may be a better option.

Compare small business loans

NerdWallet has compiled a list of the best small business loans to suit your needs and goals. We’ve assessed lender reliability and user experience, among other factors, and ranked lenders by categories that include your income and how long you’ve been in business.

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