Term Loan

Understand the Most Common Business Loan Stipulations Before You Apply

September 17, 2024 | Last Updated on: September 17, 2024

Russ Shumaker
By Russ Shumaker
business loan requirements

In this article:

Entrepreneurs face a lot of challenges when running their businesses. One of the biggest for new business owners is figuring out how to get financing for their business needs. Small business loans are a great solution for most companies, but there are some business loan requirements you should know before you start the business loan application process. In this article, we’ll cover loan requirements and how they apply to the different types of small business financing.

Typical requirements for a small business loan

You can use a small business loan for many things, including business licenses, working capital, renovations, expansions, commercial real estate, and even equipment.

You can get small business loans from traditional lenders, like banks and credit unions, and alternative lenders, like online lenders.

Business loan requirements vary depending on the type of loan and the lender you use. Many small businesses like to work with online lenders because they have more options and the approval process is faster.

While the application process varies from lender to lender, understanding the common business loan requirements can help speed things up. Even though the application process for a business loan is similar to personal loans, there are some differences in the loan eligibility criteria. Most small business lenders look at the following factors:

You may also like: revenue-based loan stipulations

Credit

Lenders will check your creditworthiness to predict how risky it would be to loan you money. Often, a lender will look at both business credit history and your personal credit score of the business owner.

Business credit is based on your previous payment history, reputation, and the annual revenue of your company. Credit bureaus like Dun & Bradstreet provide this information. Personal credit cores, or FICO scores, are based on your credit use as reported by credit bureaus like Experian. Although there isn’t a standard minimum credit score for loans, small business owners should review their credit report to make sure there are no errors before applying.

Income

Lenders also look at cash flow and net income. Cash flow shows how much money is coming in and out of your business. Net income tells the amount of money left over after you’ve paid all of your costs. You can find your net income on your financial statements, like profit and loss statements or annual income tax returns.

Income and cash flow can be intimidating concepts for new businesses, but there are also several loans that cater to startup entrepreneurs.

Time in business

Some lenders, especially traditional banks, require businesses to be at least two years old before they’ll approve a loan. To check your company’s age, banks look at your business bank account to see how long it’s been open. If you’ve been in business for less than the listed number of months, you may still meet the eligibility criteria for a loan, but with shorter loan terms and higher interest rates.

Debt

Lenders also look at how much debt you have before deciding to give you a loan. During the business loan application process, they may calculate the debt-to-income ratio of your company. They may also request a current debt schedule to review payment amounts and your track record for on-time payments to see if they align with their business loan requirements. Make sure you’re making payments on time!

Collateral

Collateral is something valuable, like real estate or equipment, that borrowers offer to secure the loan. If you default on the loan, the lender will take the asset to recoup their money. Offering collateral is a great solution for new businesses that haven’t a long business credit history or for borrowers with bad credit.

Common business loan terms

In business financing, business loan term options describe the amount of time you have to repay your loan. Typically, loans are described as short-term or long-term but there are also medium-term loans. The terms assigned to each type of loan are approximate because the exact number of payments will be specified in the loan agreement after the business loan requirements have been met.

Short-term loan

Short-term business loans require that the debt be paid off in full or refinanced within 0-18 months. Short-term loans include merchant cash advances and microloans.

Medium-term loan

Medium-term loan options like term loans, lines of credit, equipment loans, and SBA loans have repayment periods of 1-5 years.

Long-term loan

Long-term loans have repayment periods of more than six years. These are typically term loans from banks, credit unions, or online lenders. Long-term financing options may include commercial real estate (CRE) financing, bank loans, equipment financing, and SBA 504 loans.

Types of business loans

There are several different types of business loans, so borrowers that have trouble meeting the small business loan requirements for one option may find that they qualify for another.

Term loan

A term loan gives borrowers a lump sum of money upfront, which is repaid later, with interest. Interest rates for term loans can be fixed or variable, where they fluctuate based on the market rate.

Term loans can also be either secured or they can be unsecured. What’s the deal with secured vs. unsecured business loans? Secured loans require borrowers to put up collateral, unsecured loans require no collateral. Although, borrowers may still be required to attach a personal guarantee or provide a down payment with unsecured loans.

Equipment loans

Equipment financing can be used to buy things like computers, computer software, landscaping equipment, machinery, kitchen appliances, and even copiers. Since whatever you buy is collateral for the loan, equipment financing can offer low-interest financing.

SBA loans for small businesses

SBA loans are a business financing option for small business owners where the funds are partially guaranteed by the U.S. Small Business Administration.

SBA loans generally require good credit and offer lower interest payments and longer repayment terms than other options. That being said, the business loan requirements are typically stricter.

Some popular SBA loan programs are:

  • SBA 7(A) Loans – Approved credit lines up to $5 million that can be used for large purchases, working capital, and refinancing high-interest debts.
  • SBA Microloans – Allows up to $50,000 for approved business needs.
  • SBA Express loans – Approved borrowers receive up to $350,000 to be used as working capital.

Commercial Real Estate Financing

Real estate financing can be helpful for small business owners that want to buy office space, land, or other real estate. Real estate loans offer lower interest rates and flexible terms based on the loan amount, lender, and creditworthiness of the borrower.

Other types of small business financing options

Small business owners don’t have to rely on loans to fund their companies. Some alternative funding options use a credit check for approval. But others may use unpaid invoices, credit card sales, or formal financial projections when reviewing applicants.

Merchant Cash Advance

A merchant cash advance (MCA) is a way for small businesses to use future credit card sales as collateral to receive a cash advance. Once the funds are received, the borrower repays the advance with weekly or monthly payments based on an agreed-upon percentage of sales. Merchant Cash Advances are a great financial tool for borrowers that have bad credit or don’t have a long business credit history.

Business line of credit

A business line of credit works kind of like a business credit card. Borrowers are given a credit line they can draw on anytime they need cash. Best of all, you only pay interest on the amount you use. And when the balance is repaid, the funds become available again.

Invoice financing

Invoice financing is a way for entrepreneurs to take out a line of credit using the unpaid invoices as collateral. Approvals for invoice financing are typically based on sales, so they’re a great option for entrepreneurs that are still building good credit.

Invoice factoring

Invoice factoring is a financing option that lets small business owners receive cash for invoices right away. Like invoice financing, invoice factoring uses the business’s accounts receivable to secure capital. The factoring process works when the borrower sells all or some of its unpaid invoices to a factoring agent at a discount. The invoice factoring agent then collects on the invoices and sends the balance to the business, less fees which are calculated at a set factor rate.

Crowdfunding

Crowdfunding is another popular way to raise capital without loan approval. It works when an individual, or business owner, collects many small contributions from different investors or donors. Most crowdfunding is done using platforms like GoFundMe or Kickstarter. It’s also important to know that most crowdfunding campaigns fail.

Business Credit Cards

Business credit cards are another financing tool business owners and entrepreneurs can use. Credit cards have high interest rates, so they can be more expensive than loans. But if you can pay off the balance, they are useful. Business credit cards work just like personal credit cards, but all activity is only reported to the business’s credit history.

Bottom line

Before applying for a small business loan, it’s important to understand the common business loan requirements and the types of loans available. Once you understand the eligibility requirements, you can find the best option for your company.

For Joyal Gonsalves and Sarvinder Singh, owners of Taste of Mumbai, the best financing solution was funding arranged by Biz2Credit. If you are considering business financing, reach out today to learn about your customized loan options.

FAQ

  1. What disqualifies you from getting a business loan?

    If you have bad credit, no collateral, or a business that has just started and has no revenue, you may be disqualified from getting a business loan.

  2. Is it hard to get a business loan?

    Getting a business loan is easy if you meet the requirements and follow the instructions on how to apply.

  3. What is required for a small business loan?

    To get a business loan, you’ll need your financial documents, any relevant business paperwork, your business plan, and sometimes, collateral.

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