Qualification Checklist for Startup Business Loans: Requirements, Steps, and More

Business Guides

Jacques Famy Jr
Review By Todd Millman

Running a startup can be an exciting time. You're stirring the pot, disrupting the marketplace, and looking to achieve success at breakneck speeds. However, plenty of operational roadblocks are on the horizon, even from the beginning. Many startups hit the ground through equity financing and debt financing. We're going to focus on the latter and provide some concrete ways you can stay prepared and ready to qualify for startup loans.

Startup loans are diverse, offering a wide range of benefits depending on which loan product you choose. No matter which option you go with, staying prepared for the road ahead with proactive steps can ensure a smoother qualification process. We will go through a comprehensive checklist that will outfit startup owners with the right tools, documentation, reporting, and information checklist for a startup business to qualify for financing. 

How To Qualify For A Startup Business Loan?

You have a few choices when it comes to lenders for your startup. However, banks are far less likely to lend to inexperienced business owners with little to show for taking on the risks associated with loans. Luckily, alternative lenders offer many loan products and options for startups to take advantage of today.

Note: You'll rarely have to meet every requirement on this checklist, but the more boxes you check — the more likely you'll qualify for startup loans and financing opportunities.

1. Determine Goals and Calculate Loan Amounts

The first question you should ask is, "Why do I need a loan? What are my projections for utilizing this loan?" Answering these questions can offer valuable clarity into your business goals, future account deposits, and the loan amount required. If you're looking for a significant capital deposit, utilizing collateral might be necessary—particularly if your business is short on period and credit history, and lacks sufficient revenue.

Be ready to enlighten lenders about why you're securing a loan. If it's for bringing new staff aboard, present how many new recruits you're employing and the associated pay. If you're purchasing new equipment, share the model. Including these details in your business plan will not only guide you in choosing the right loan but also provide lenders with projections of their return on investment, thus shaping an understanding of how beneficial their investment in your startup will eventually be.

2. Boost Your Credit Score

Unsurprisingly, your credit score will play a crucial role in the startup loans' qualification process. This includes your personal FICO score, a key factor that traditional lenders like banks pay major attention to while evaluating your loan application. Online alternative lenders may not prioritize FICO scores quite as much, but it is still an influential factor.

Depending on the startup loan product, lenders may look at your personal credit score, business credit score, or a combination of the two.

Your personal credit scores, including your FICO score, are considered significant, even with LLCs and corporations. This is because how a business owner manages their personal finances, largely reflected in their FICO score, can be a solid representation of their business spending habits.

  • Try to have a personal credit score, preferably a FICO score, of at least 600.
  • A personal credit score of 700 or above will be extremely beneficial.

Business credit scores are obviously an influential factor in business loans and conveys your company's history of paying back lenders. For startups, this may be challenging, as acquiring loans to build a business credit can be difficult at inception. The process of establishing a business credit score is straightforward; whether opening a bank account, incorporating your business, or registering for your employer identification number (EIN). Here are some tips for boosting your business credit.

There are plenty of reputable business credit reporting agencies, the three most common being Dun & Bradstreet, Experian, and Equifax.

While credit histories, including your FICO score, are a significant factor in loan qualification, there are other ways to secure a business loan even with less-than-perfect credit, too.

3. Create or Update Your Business Plan

Your business plan should always reflect the current state of your company and its operational objectives. A startup business plan is not a super-complex document but is critical as it portrays your business goals and your roadmap to achieve them. Such a plan is also significant to lenders as it gives them a glimpse into your startup's vision.

Here are some of the key elements of a successful startup business plan.

  • Executive summary
  • Opportunities & Objectives
  • Execution
  • Operations and Management Summary
  • Analysis of business invoices and Finances
  • Appendix

If you haven't crafted a startup business plan — you absolutely should do so immediately. For those with a current business plan, make sure it is up to date, incorporates any new business invoicing strategies, and accurately mirrors your business's current state and any fresh plans or goals in mind.

4. Report Your Startup's Time in Business

Another key element to qualifying for startup loans and financing is your time in business. Not only is this an essential criteria for small business financing, but it's also incredibly crucial for maintaining your credibility. This step might seem simple and quick, but it assumes immense importance.

Most traditional lenders, like banks, necessitate at least 2-3 years of business operation before offering financing. This serves as a safety net for them, reducing the risks associated with the loan.

On the other hand, alternative lenders can sometimes prove to be a boon for startups, offering cash flow despite a shorter business duration, typically just around a year. If your business hasn't been operational for a full two years yet, demonstrating your potential and distinctive value in your business plan can be a game-changer. Remember, the importance of accuracy in these details can't be overstated—omission or misinformation can lead to issues down the line.

  • If you are pre-revenue and just an idea for a business you will need to consider SBA startup loans such as SBA 7 (a) or SBA 504C.

5. Accurately Enter Your Industry and Entity

Here's another simple one that often gets overlooked. You must accurately classify your industry and entity when applying for a loan or various startup financing opportunities according to the articles of incorporation. Making a mistake here can prove to be a preventable hurdle, extending the funding process unnecessarily. This particularly resonates when considering some lenders restrict which industries or entities they will extend credit to. Therefore, knowing whether your company falls under such categories as supermarket, automobile, or even gambling businesses, could be crucial.

Similarly, correctly defining your entity is equally important. Are you a corporation? An LLC? Regardless, the differentiation significantly impacts loan opportunities as some banks are less likely to assist certain entities. Appropriate classification can save you a ton of time when scouring America's lending landscape for financing options.

6. Prep Your Paperwork

Depending on what type of loan or financing opportunity you're looking for — you'll need a wide range of paperwork at the ready. Whether eyeing SBA lenders or alternative financial options, preparation is key. This necessary, albeit time-consuming endeavor, involves gathering mountains of paperwork if you're specifically opting for an SBA loan. It's always beneficial to maintain your paperwork house, ensuring preparedness for any abrupt cash flow requirements.

Here's some paperwork you should have ready and updated at all times, especially keeping tabs on items like business and personal tax returns.

  • Business licenses and permits
  • Employer identification number (EIN)
  • Income statements
  • Balance sheet
  • Bank statements
  • Personal & business tax returns
  • Accounts receivable aging & accounts payable aging
  • Payroll from the past 6 months or more
  • Business debt schedule
  • Copy of your commercial lease
  • Paperwork on your entity structure (LLC, S-Corp, C-Corp, etc.)
  • Sales agreements
  • Contract with suppliers or vendors
  • Purchase agreements
  • Corporate bylaws and operating procedures

Do note that some of these might not apply to startups. Yet, it's best to remain prepared and updated before tumbling into the application process to minimize wasted time and potential headaches. Additionally, if you're scouting for alternative financing, there won't be as much stress about the intimidating roster of paperwork we've outlined. The importance of an email for communication throughout the process cannot be overstated.

Business Loan Essentials

1. Personal Credit and Business Credit Significance

When you apply for a small business loan, lenders typically scrutinize both your business and personal credit scores. Your credit score is akin to a report card, revealing how responsible you are with money. The better your credit score, the more credibly you appear to potential lenders, such as startup loan specialists like Fora Financial, Credibly, or Fundbox. Most banks and financial institutions consider your personal score even when you apply for a business loan. Specifically, a credit score of 650 or higher highly improves your chances of being approved for an SBA (Small Business Administration) loan.

Many lenders also scrutinize your business credit score when deciding your loan application. A detailed view of your business credit history and score can be culled from business credit bureaus like Experian and Dun & Bradstreet. Crucially, a strong business credit score can help separate your personal finances from your business ones.

Despite seeming irrelevant, your personal credit score is valued significantly by lenders as it serves as a metric for your financial responsibility, thus rendering a prediction of how you'll manage your business. In tandem, your business credit score could be the tipping point in whether or not your business receives loan approval. As such, maintaining both your personal and business credit is absolutely essential to maximize your chances of securing business funding.

2. Understanding Debt-to-Income Ratio for Loan Approval

Understanding your debt-to-income (DTI) ratio is crucial when applying for a business loan. In addition to DTI, another ratio some lenders consider is the debt-service coverage ratio (DSCR), which measures your business' annual net operating income in relation to its total annual debt. DTI ratio weighs your monthly debt against your gross income. To calculate it, first add up all of your monthly liabilities, including home, car, credit card loans, and then divide that sum by your gross monthly income.

For example, if your monthly debt payments sum up to $10,000, your gross monthly income is $20,000, your DTI ratio is around 50% ($10,000 divided by $20,000). If your business' EBITDA is $100,000 and its total annual debt is $80,000, your DSCR would be 1.

DTI ratio and DSCR express your ability to manage and repay debts. A higher DTI ratio or lower DSCR suggests a significant risk to potential lenders, as it might entail difficulties in paying back the loan. Therefore, a lower DTI ratio and a higher DSCR is more attractive to lenders.

While minimum DTI and DSCR requirements vary from lender to lender, a good rule of thumb is to keep your DTI ratio at or below 43% and your DSCR as high as possible. A DTI of 28% or lower might be specifically asked by lenders, which is considered a healthy ratio.

A balance sheet and your DTI ratio, as well as your DSCR, would also be asked for by lenders. By setting out your business's assets, liabilities, and equity, a balance sheet helps you to determine whether you can afford to spend more to boost your growth.

Remember, not all debt carry the same weight. Commercial and other forms of business-growth-oriented debt may be seen in a different light by lenders, but keeping your DTI ratio and DSCR to an acceptable range is critical to qualify for a loan.

3. Collateral Considerations for Secured Loans

Applying for secured business loans, in most situations, requires collateral — a tangible asset pledged to secure the loan. Typically, collateral requirements can vary depending on your specific loan. If the borrower fails to repay the loan as agreed, lenders may seize this collateral, such as heavy machinery in the business, to recover their losses. Certain loans, like SBA 7(a) loans above $25,000, explicitly require collateral and a personal guarantee.

Collateral can range from heavy machinery to real estate, inventory, or even future receivables. It can also extend to personal assets like home equity. However, not all business loans require collateral. Certain high-risk loans may require significant collateral, whereas others might not require any at all. Nonetheless, a comprehensive business plan and strong financial statements can often help you avoid the need for collateral.

Some loans, like those for machinery, are naturally backed by collateral, for instance, in equipment financing, the machinery you are financing is pledged. Because the financing is backed by collateral such as machinery, lenders often offer lower interest rates than an unsecured loan with no collateral.

Understanding each loan's collateral requirements, such as whether they allow you to claim accounts receivable and other assets, is paramount to a good borrowing experience. Therefore, it is advisable to prepare a collateral document describing the cost/value of personal or business property, like machinery, that will be used to secure a loan, making the loan application process smoother.

Coping with Business Loan Rejection

1. Common Reasons for Loan Rejections

Applying for a business loan can be a complex process, and sometimes your application may be denied. Understanding the common reasons for loan rejections means peeking into the heart of lending decisions, a process that can help you when applying for a business loan again.

  • Insufficient Credit: One of the frequent stumbling blocks in lending decisions involves the applicant's credit history. Indeed, both personal and business credit scores significantly affect the decision-making process. If either score is low, it may serve as a red flag to lenders, indicating a potentially risky investment.
  • Insufficient Cash Flow: Lenders want reassurances that you can fulfil the responsibility of repaying the loan on time. If your business isn't generating sufficient revenue to manage the loan payments comfortably along with your other expenses, this may tip the lending decisions towards a rejection.
  • Lack of Business Plan: In their lending decisions, lenders seek a detailed and extensive business plan that displays your business's strategy, market, and financial forecasts.
  • Insufficient Collateral: Collateral can reassure lenders that their funds can be recovered in case of default. If you can't offer enough collateral to cover the loan value, this factor can significantly impact lending decisions, tipping them towards a negative outcome.
  • Short Business History: If your business is new or hasn't been in operation for a considerable time, it's challenging for lenders to gauge the risk attached with the loan, influencing their lending decisions. Many traditional lenders mandate at least a year, sometimes two, of solid business history.
  • High Debt-to-Income Ratio: A soaring DTI ratio demonstrates that a significant portion of your income is indebted, leaving less for other expenses. A high DTI ratio can shake lenders' confidence in your ability to keep up with consistent loan repayments, potentially swaying lending decisions towards rejection.

A loan rejection isn’t the end of the road, however. Consider it as a prompt to identify what went wrong, rectify the issues, and re-apply when you’re ready.

2. Steps to Take Post Loan Rejection

Getting turned down for a business loan can be disheartening, but remember, it's not the end of your entrepreneurial journey. Here are some proactive steps culled from various articles of incorporation and editorial content you can take after a loan rejection:

  • Understand the Reasons for Rejection: The first step after a business loan rejection is to grasp why it detonated. Much like insights made evident in articles of incorporation, lenders should provide a reason or reasons. Understanding these will help you develop a plan to fine-tune your chances next time.
  • Discuss with Your Lender: If the reasons aren't clear, discuss with your lender or a financial advisor. Similar to the information found in authenticated editorial content, they can provide invaluable insights into what factors weighed into the rejection and how you can amplify your application next time.
  • Review Your Business Plan: Your business plan, much like your company's articles of incorporation, is the blueprint for your enterprise. Methodically evaluate it, punctuate it with recent facts and figures, and ensure articulation of your business and your vision.
  • Improve Your Credit: An unfavorable credit score is a common culprit of loan rejection. If this has pinged as an issue, initiate steps to cultivate better credit. This might involve prompt bill payments, minimizing your debt encumbrance, or challenging any inaccuracies on your credit report akin to examining editorial content.
  • Explore Alternative Financing Options: Traditional lenders aren't the only source of business funding. As captured in diverse articles of incorporation, explore alternative lending options, such as crowdfunding, peer-to-peer lending, or angel investors.

Remember, loan approval isn't an overnight success. As reiterated in many an expertly vetted editorial content, it requires pondered planning, tactical decision-making, and patience. Keep unearthing your options, refining your business plan, and enhancing your credit where necessary, and your chances of securing a loan could escalate noticeably.

Looking at Alternatives and Advanced Options

1. Qualifying for a Business Credit Card

Business credit cards can offer an alternative line of extra capital and can help with managing cash flow, especially for early-stage businesses or startups. In addition to these advantages, getting qualified for a business credit card might be a stepping stone towards more elaborate car financing options, if a vehicle is involved in your business operations. This typically requires a good personal credit score and a decent debt-to-income ratio. Lenders consider validating your creditworthiness based on these key factors:

  • Credit Score: Most credit cards, including those dedicated to car financing, require good credit, with the minimum credit score typically around 650, and often higher for competitive rates. A good credit history indicates your financial responsibility and credibility. The higher the score, the better your chances of approval.
  • Debt-to-Income Ratio: Just like a loan or a car financing application, having a low debt-to-income ratio can enhance your chances of getting your credit card application approved. A high DTI ratio might imply that you are overly dependent on borrowed funds, which could raise concerns about your ability to manage additional debts.
  • Income: Most small business credit cards base their decision on the owner’s personal income and the overall income from all sources, not just business revenues. This is also a significant consideration in car financing.

While business credit cards can provide immediate funding, they usually come with higher interest rates compared to traditional loans and car financing options. Regular, on-time payments can help build your business credit history and improve your prospects for car financing in the future. It’s also crucial to see if your credit card provider reports to the credit agencies and sometimes you might have to provide a personal guarantee as collateral – this can also be the case with car financing. Note that responses have not been reviewed, approved, or otherwise endorsed by the credit card, financing, and service companies and it is not their responsibility to ensure all posts and/or questions are answered.

2. Contemplating Alternative Financing Options

If traditional lenders have turned you down, do not despair. There are several other paths to consider for your financing needs, such as Ondeck offerings including SBA Express loans and invoice factoring.

  • Crowdfunding: Crowdfunding, a popular alternative to traditional lending over recent years, allows you to pitch your business plan to the masses, typically in exchange for a percentage of your business or rewards for those who pledge to your campaign.
  • Microloans: A microloan is a small loan, usually less than $50,000, available through non-profit community lenders. Microloans can serve as a great starting point for new entrepreneurs or those with little to no established business credit.
  • Venture Capital: Venture Capitalists make direct equity investments in new and expanding businesses. They're common in high-growth industries, like technology. However, be aware that with equity funding, you're selling ownership stakes in your business.
  • Invoice Financing: Often provided by alternative finance companies invoice financing advances you cash based on outstanding invoices. This funding can be an ideal fit for businesses having B2B customers and long invoice cycles but need immediate cash flow. It's worth noting that such compensation typically requires a shorter repayment period.
  • Merchant Cash Advance: A Merchant Cash Advance provides businesses upfront cash in exchange for a share of future sales. This form of financing is similar to gambling on your future earnings.

Remember, each of these alternative financing options has its strengths and weaknesses. To get an authentic snapshot of each option, consider your needs, conduct comprehensive research, including seeking a transparent disclosure of requirements and potential risks, and learn about the pros and cons. In some cases, it may even be of value to consult with a financial advisor to determine the best placement for your funds within these options.

Some Finishing Touches On Requirements for Startup Business Loan

Now that you have prepared many of the essentials in your checklist, we thought a few more honorable mentions should be added.

  1. Prep any collateral you may need to consider all forms of collateral to secure the best startup financing. However, alternative lenders usually offer a wide range of unsecured business loans that don't require collateral.
  2. Disclose other businesses you are involved in during the application process. Similarly, make sure to disclose ownership parameters regarding part-ownership, etc. Alternative lenders usually only require 50% ownership, meaning getting a loan only requires one or two people instead of an entire panel.
  3. Choose your business loan carefully. Although the startup loan list is limited compared to small businesses, you have many options.

Advancepoint Capital offers many loans and financing opportunities you can take advantage of today. We offer solutions for poor credit, limited time in business, and more. Finding the right loan for your business can be tiresome, but it will set you up for long-term success.

Jacques Famy Jr

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