SMB Loan Requirements: How to Get Small Business Financing

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Getting approved for a loan can be tough: according to the Small Business Credit Survey (SBCS), over half of small businesses say their funding requirements aren’t met. What’s more, only 20% of those who applied for financing received everything they needed. 

Small and mid-sized businesses (SMBs) rejected for funding have to forego important business decisions that could contribute to growth. They also have to make peace with the fact that they spent time and energy applying, only to be denied.

But even if you don’t get the loan you want the first time, that doesn’t mean your business will never receive the financing it needs. The fact is that funding is vital for driving growth and being successful. You’ll need it at some point, even if you can get by without a business loan right now.

And you can qualify for financing — you just have to understand what the small business loan requirements are and know how to improve your chances of getting approved. 

That’s exactly what we cover in this article. Read on to learn about the main requirements for small business loans and what you can do to make getting financing easier.

How Do You Qualify for SMB Loans?

To qualify for an SMB loan, you need to know what the receiving institution expects. Then, you have to do the best you can to meet those requirements. 

You can get a small business loan from traditional banks, online lenders, credit unions, the Small Business Administration (SBA), and more. Each of these institutions provides unique opportunities for SMBs.

Banks provide larger sums but may have higher interest rates and require collateral. You’ll have a better chance of qualifying if you’ve been in business for a year or more and have good credit.

Other lenders are more flexible when it comes to requirements but, in compensation, may offer lower amounts.

And Small Business Administration loans are the best option as they offer lower interest rates for a large loan amount. However, to apply, you’ll have to submit a long list of documents and wait for three months or more to find out if you qualified.

Which lender you choose depends on your goals and situation, but there are a few eligibility criteria that any business must meet to apply for a small business loan, including:

  • Be a for-profit business
  • Operate in the U.S. or its territories
  • Have reasonable owner equity to invest

You’ll have to pay for the costs of financing — including interest charges and any loan administrative fees. So businesses can also explore alternative resources, such as personal assets or friend and family loans, before adding on loans.

Why Apply for SMB Loans?

As a small business, you should always try to stay one step ahead financially. You want to be able to cover expenses, grow your business, and earn a profit to make it all worthwhile.

When you apply for an SMB loan, you can do all these things because you can use the loan amount to take financially wise steps for your business. Here are just some of the things you can do with a loan:

  • Improve your cash flow
  • Repay or consolidate debt
  • Expand by investing in capital and business assets
  • Expand by hiring new employees
  • Get working capital to pay for everyday operations

What Are the Requirements for Small Business Loans?

Whatever reason you have for applying for a small business loan — to refinance business debt, use as a down payment for expansion, or something else — there are several requirements you must meet on top of the basic eligibility criteria for business borrowers.

These requirements apply no matter the type of institution you’re applying with, but some lenders might be more stringent than others.

For example, SBA loans and bank loan programs require detailed financial documents. Some banks will also expect at least a year of business activity.

With online lenders, you could get quick business loan approval even if you’re a new company that doesn’t have a long track record.

Let’s take a look at the main small business loan requirements.

Requirement #1: Good Credit

One of the first things any lender will check is your credit score. Banks and SBA lenders will look at your business credit history and most lenders will also check your personal credit score. This will help them determine how responsible you’ve been with your personal finances and your business finances.

Banks also look at the personal credit of the small business owner or an officer if they require a personal guarantee. Requesting a personal guarantee is standard with business loans, especially for those that don’t require collateral.

A high credit score won’t just help you qualify, it could also reduce your interest rate. That’s because a good score indicates to lenders that you have paid back previous financial obligations on time.

A good credit score for most lenders is 700 or above — but what can you do if you don’t have this score?

You can build your business and personal credit by making on-time payments for any existing accounts, such as credit cards or auto loans, and keeping a low balance on any lines of credit. 

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And while small business owners with low credit scores will have limited options when it comes to an SBA loan or a traditional bank loan, you can still qualify with many online lenders if you have bad credit.

Requirement #2: Positive Cash Flow 

Another crucial requirement is financial health. As part of your application, you have to submit your business bank statements and financial statements to demonstrate a positive cash flow and a high enough income.

Financial statements include your cash flow statement, balance sheet, and income statement (also known as the profit and loss statement). You can also include financial projections for each of these so lenders know where you foresee your business going in the next few years.

Lenders will use these statements to calculate the debt service coverage ratio, debt to income ratio, and other metrics that prove your business can handle the burden of a small business loan.

Requirement #3: Enough Time in Business

SMBs can be a few months old or years in the making. Small business lenders take the age of a business into account before deciding whether to provide funding or not, simply because newer businesses are more likely to fail than more established ones.

The older your business, the better your chances of receiving approval. Fledgling businesses should look for alternative funding means, such as using your personal assets, asking friends and family, or crowdfunding, and then apply for a small business loan.

Requirement #4: Available Collateral

Even after checking the business owner’s personal and business credit and establishing the financial health of your business, lenders may still want you to use collateral to secure the loan. 

Collateral could be anything with proven value, from equipment and real estate to personal assets. If you have collateral you’re willing to use, such as your personal home or an investment property, you can consider applying for a secured loan.

With a high-value item securing the loan, the lender has a way to recoup its losses if your business cannot make monthly payments. With this extra security, you’re more likely to qualify for small business financing, and you’ll get a lower interest rate than you would with an unsecured loan.

Collateral is also crucial if you’re applying for a large loan.

If you don’t have collateral, that’s perfectly fine too. You can receive a smaller loan amount, pay that off to build good credit, and then get approval for a larger loan in the future with collateral.

Requirement #5: Low Industry Risk

Another factor that is important to lenders is the industry you are in. Every industry has its unique characteristics and, as such, its own risks.

Lenders already know the potential risks for every business type, which can include seasonal downturns and significant cash flow fluctuations.

For example, many lenders will not fund businesses in the adult entertainment industry, gambling, or even landscaping. The reality is that some industries are viewed as socially undesirable, while others may be profitable only during a specific period of time during the year, which can make repaying a loan more difficult.

If your small business belongs to any of these industries, you may have trouble securing a loan from traditional lenders, such as banks, or accessing an SBA lender. But you could still apply with online or alternative lenders and get approval.

Why SMB Applications Might Be Denied — And What You Can Do About It

You might think that because you’ve handed in all your documents correctly and on time, you’ll get approval for a bank loan or an SBA loan. The truth is, lenders may still deny your application, even if you’re a successful business owner.

Here are a few reasons your application could be rejected and what you can do about them:

  • You have an overall low personal or business credit score. Try to apply with alternative lenders or have collateral on hand to help your case.
  • You do not have enough collateral or assets to secure your loan. Apply for a smaller amount that doesn’t require collateral.
  • You don’t have enough working capital to repay your loan. Delay your application and work on promoting your business so you increase revenue and cash flow.

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  • You have too much debt. Consolidate your debt into one manageable account and try reapplying once you’ve decreased the balance.
  • You have previously defaulted on a loan. Use the business’s financial statements and projections to prove that your situation has changed and your business is healthy enough to meet its obligations.
  • Lenders don’t think you have sufficient financial need for a loan. Present a detailed business plan that explains what you will use the loan for and how it will help your business grow.

Every small business faces obstacles that can make getting small business financing difficult — whether it’s poor credit, not enough collateral, or simply not being in business for long enough.

But the good news: there’s something you can do about every challenge, which means you will be able to eventually get the funding you need. 

Conclusion

A small business loan is incredibly useful for ensuring day-to-day operations and long-term success. You can use the additional cash influx to purchase equipment, meet your cash flow needs, fund a marketing campaign, hire more people, or pay for anything else that will support your operations.

Applying as a young business can feel daunting, but once you get a handle on meeting the requirements, your journey toward funding can be a breeze.

If you’re ready to apply for financing for your small business, look no further than AdvancePoint Capital, America’s favorite small business funding marketplace. We offer competitive loans for every type of business.

Join the more than 7,500 small businesses that have already relied on AdvancePoint Capital to get over $375 million in funding. Get a quote now and make your business funding dreams a reality.

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