Business loan

What are the criteria for a small business loan and how do I apply?

Editorial credit: Viktoriia Hnatiuk

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Every start-up must acquire small business loans to thrive in the market. They serve as the foundation for your business to move forward.

Applying for a small business loan is easy as long as you know what lenders are looking for. By understanding the process and requirements, you can avoid Questions when it comes to your application. Most importantly, preparing the documents streamlines your application process.

Approval of your business loan depends on a set of criteria given by the lender of your choice. But before we learn what these requirements are, let’s first discuss where you can apply for a small business loan.

Sources of Small Business Loans

Small business loans help start-up businesses get started, manage expenses and grow. You can borrow a minimum of $5,000 from Small Business Grants. And some countries/banks even offer up to $300,000 which is enough for a start-up business.

Banks are the main source of small business loans. However, they can be strict in their application.

They need to be sure that your business will be able to repay the loan. Even if you are a start-up business, you can qualify if you have a good business plan and personal assets to pledge.

Each bank has different loan alternatives with varying amounts, maturities and fees.

Another source of funding is government grants. They are one of the most popular funding sources since they do not have to be repaid. Usually, government grants target certain industries or groups of people, such as youth or women.

In the United States, however, small businesses can obtain financing from the Small Business Administration (SBA program). The goal of the program is to improve access to financing that small businesses would otherwise not have access to.

Alternative sources of business loans: non-bank lenders

Small businesses can get plenty of loans from banks. However, they are usually the most difficult source for a start-up business to get money from.

As an alternative, most small businesses get their financing from non-bank lenders. They provide capital to companies that do not meet the size, age or credit requirements for a bank loan. Non-bank lenders will help you grow so you can eventually qualify for a bank loan.

As a start-up business owner, you should always be on the lookout for new and better sources of funding. You can also apply for small business loans through direct lenders online. They are a good choice if you want to speed up the loan application process.

Most Small Business Loans have different alternative financing options that depend on your needs. Some lenders also offer bad credit loans which are useful for small businesses. Moreover, start-ups are still building their credit. Online lenders are more laid back when it comes to credit scores and so they become a natural choice.

Private lenders do not rely on investors. Instead, they provide loans using their own funds. Since they are not bound by the same laws as traditional lenders, they can be more creative with what they offer. Additionally, they are more flexible with the amount of money they lend. You can apply for small loans that are otherwise unacceptable to other lenders.

Unlike private lenders, market lenders are affiliated with investors. They connect small businesses with potential investors directly using an online platform. These lenders accept loan offers from investors and disburse the funds to borrowers, and they earn through commissions.

With the help of an online platform, you can raise enough funds to support your business. There are different types of crowdfunding and know which type suits you is a big game changer.

The disadvantage of crowdfunding is that it does not guarantee funding. Instead, it works like a giveaway where investors look at your offer and decide if they can lend you money or not. It therefore depends on the attractiveness of your offer.

Requirements to apply for a small business loan

Each lender has a specific set of criteria that you must meet. There are, however, certain loan criteria that lenders generally look for. Below is a breakdown of all the credentials typically required for small business loan applications.

  1. Credit score

Credit scores let lenders know your ability to repay the money you borrow. Personal credit scores help them see how you are managing your debts.

Generally, you need to have at least 600 FICO scores. With such ratings, lenders are more likely to approve your loan. Although this is the case, you can still apply for a business loan with bad credit scores.

You can get credit reports and scores outside of major credit agencies. However, lenders rarely use them to make credit judgments. FICO scores from major credit reporting agencies are always recommended.

  1. Time spent in business

The length of your business is also an important factor that lenders look at. The longer you’ve been in business, the better, as it gives the impression that your business has been successful over time.

Generally, you must have been in business for at least two years. It’s not impossible to get a business loan if your business is less than two years old, but it does limit your options. Banks are less willing to lend to companies that are less than two years old. However, this does not end your loan application since you can still show your worth through other aspects.

  1. Business plan

Not all lenders will require you to submit a business plan, although some do. Nevertheless, you should know how to write one for such cases.

A business plan helps in developing a growth strategy for your business. Your strategy should include financial planning and a marketing and sales strategy. Additionally, it should have an explanation of the day-to-day operating procedure of your business. This will help prove that your business is generating revenue and succeeding.

  1. Collateral

Collateral refers to the actual assets you currently own. This includes your invoices, equipment, businesses and real estate. Although it is usually not necessary, you may be required to set up a fixed asset to obtain a loan. If you don’t repay your loan, lenders can sell your collateral to recoup some of their losses.

Not all lenders require specific collateral. However, banks will want to know what kind of collateral you have and how much it is worth. Alternative lenders, on the other hand, only require a personal guarantee as a form of security.

  1. Annual cash flow

A steady, healthy cash flow shows lenders that you can make the loan payments. It is simply a reflection of the health of your business. Lenders will most likely look at costs in addition to income to gauge how lucrative your business is.

If your business regularly deals with invoices, there is no doubt that you have had to deal with late payments. Unpaid invoices can have a significant impact on your company’s turnover and cash flow.

Fortunately, invoice factoring is a viable financing alternative for business owners. Through this method, your business can sell its unpaid invoices to a third-party lender. Instead of waiting for your customers to pay their bills, you’ll have extra cash flow to help you out.


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Steps to apply for a small business loan

Small business loan requirements vary by lender. That’s why it’s important to talk to lenders about their process before applying for a loan. This way, you will be ready to gather all the documents or information that you will need to submit.

With that in mind, let’s go over the basic steps you’ll need to take to get a business loan.

  1. Determine why you need to apply for a small business loan.
  2. Determine how much debt you can afford.
  3. Review your financing choices.
  4. Prepare your loan documents.
  5. Complete a loan application.

Takeaway meals

When looking for a lender to fund your business, you need to take the time to research the loan application criteria. Each lender has a different set of criteria, but the list above includes those that are generally required.

Having a good credit score and a foolproof business strategy can increase your chances of getting a loan approved. You must also demonstrate that your business can repay your line of credit with an annual cash flow report. Lenders also need proof of your assets in case you don’t repay your loan.

Traditional banks are generally strict about this. If your application was unsuccessful, online lenders are also available.