Small Business Loan Requirements: What You Need to Get Approved

A Step-by-Step Guide

Getting approved for a small business loan can be a game-changer for entrepreneurs looking to grow their businesses. However, the process of securing a loan can seem complicated and overwhelming. Understanding the small business loan requirements can significantly increase your chances of success. In this guide, we'll break down the steps you need to take to secure the funding your business needs.

 

Step 1: Evaluate Your Business Needs

Before applying for a loan, it’s essential to determine why you need the funds. Is it for expansion, equipment, hiring new staff, or something else? Having a clear purpose will not only help you choose the right loan type, but it will also be important in explaining your business's financial needs to lenders.

Actionable Tip: Create a business plan that outlines:

• Purpose of the loan
• The amount needed
• How you will use the funds
• Projected impact on your business

 

Step 2: Check Your Personal and Business Credit Score

Your credit score plays a pivotal role in determining whether or not you'll be approved for a small business loan. Lenders use your credit score to gauge the risk involved in lending money to you.

Actionable Tip:

• Personal Credit: Most small businesses require the owner(s) to have a personal credit score of at least 650, although this varies depending on the lender.
• Business Credit: If your business is established, check its credit score as well. A higher business credit score may help you qualify for better loan terms.

If your credit is less than stellar, take some time to improve it before applying.

 

Step 3: Prepare Your Financial Statements

Lenders want to know how financially stable your business is before they approve a loan. This is where your financial statements come in.

Actionable Tip:
Prepare the following documents:

• Profit and Loss Statement (Income Statement): This shows your revenue and expenses over a specific period.
• Balance Sheet: This shows the assets, liabilities, and equity of your business at a particular point in time.
• Cash Flow Statement: This outlines the money flowing in and out of your business.

Ensure all documents are up to date and reflect your business’s current financial health.

 

Step 4: Review Your Business History and Legal Structure

Lenders will want to know how long your business has been in operation and its legal structure. Your business’s history will give lenders insight into its stability, and your legal structure determines your liability.

Actionable Tip:

• Business Age: Many lenders require that your business has been in operation for at least 1-2 years. Newer businesses might have trouble securing traditional loans but may qualify for alternative lending options.
• Legal Structure: Be sure to have documentation that shows whether your business is a sole proprietorship, partnership, LLC, or corporation. This will affect your loan options and personal liability.

 

Step 5: Gather Your Tax Returns and Other Documentation

Tax returns give lenders insight into your business’s profitability, and they may request your returns for the last 1-3 years. Some lenders may also require additional documentation.

Actionable Tip:

• Provide personal and business tax returns for the past 1-3 years.
• If applicable, include licenses (e.g., business operating license), legal contracts, and other agreements that might be relevant.

 

Step 6: Determine How Much You Can Afford to Borrow

It’s essential to borrow only as much as you can afford to repay. Over-borrowing can put unnecessary financial strain on your business, while under-borrowing may leave you short.

Actionable Tip:

• Review your cash flow to determine how much debt your business can comfortably handle.
• Consider your monthly revenue and operating expenses, and ensure that you can cover the monthly payments on the loan.

 

Step 7: Research Loan Options and Lenders

There are various types of small business loans, and choosing the right one can make a significant difference. Depending on your needs, you can explore:

• Term Loans
• SBA Loans
• Lines of Credit
• Equipment Financing
• Invoice Financing

Actionable Tip:
Research lenders that offer small business loans. Banks, credit unions, online lenders, and peer-to-peer lending platforms all have different eligibility criteria, interest rates, and repayment terms. Compare your options and select the one that aligns with your business’s needs and financial health.

 

Step 8: Apply for the Loan

Once you’ve gathered all the necessary documentation, it’s time to submit your application. You’ll likely be asked to provide all the documents mentioned above.

Actionable Tip:

• Be clear and concise in your application.
• Include any additional details that might strengthen your case, such as your business’s future growth plans or additional sources of revenue.

 

Step 9: Prepare for the Lender's Review

Once you submit your application, the lender will review your financial health, creditworthiness, and business stability. They may ask for additional information or clarification. Be ready for this and respond promptly.

Actionable Tip:
Stay organized and keep communication open with the lender. Promptly address any requests for additional documentation.

 

Step 10: Review and Accept the Loan Offer

If you are approved, the lender will present you with an offer that includes loan terms such as interest rates, repayment schedules, and fees.

Actionable Tip:
Carefully review the loan agreement and ensure you understand all the terms and conditions. Pay special attention to:

• Interest Rates: Fixed or variable?
• Repayment Terms: Monthly or weekly payments?
• Fees: Origination fees or prepayment penalties?

If the loan terms are acceptable, sign the agreement, and you’ll receive the funds.

 

Step 11: Use the Funds Wisely

Once you have the funds, use them as outlined in your loan application. Keeping track of your spending will help ensure that you achieve the business goals you set out to accomplish.

Actionable Tip:
Regularly monitor your business’s cash flow to ensure that the loan is being used effectively and that you’re on track to meet your financial goals.

 

Conclusion: Stay Proactive and Prepared

Securing a small business loan can be a complex process, but it’s entirely possible with the right preparation. By following these steps and understanding the small business loan requirements, you’ll be in a stronger position to get the loan your business needs to succeed.

Remember, maintaining a strong business plan, keeping your finances in order, and knowing your loan options will make all the difference. Check our product list for funding ready financial statements. Our consultants can draft for you customized business plan and prepare financial statements. Contact Us today.