Entrepreneurship is a great step towards building personal wealth. Before most people can get to that point they first invest a lot of money into their dream. It is not uncommon for an individual to use their life savings or cash0in a 401K to start their own business.
Studies show that seventy-five percent of small business will close by year five. The main reason is the lack of finances. A business that does not have working capital can end up dependent upon their accounts receivables to keep the lights on.
What happens when clients don’t pay on time or you can’t get credit to keep your merchandise on shelves? Simple glitches can lead to huge hardships.
The Small Business Administration (SBA) is a government agency that supports small businesses and guarantees various types of loans for those businesses.
Learn more on how to qualify for a business loan and 15 requirements of most lenders.
Know How to Qualify for a Business Loan Ahead of Time
A loan backed by the SBA can take up to 90 days from starting the process of getting the money in hand. Not having the required documents can prolong the process.
The requirements are pretty straightforward. If you have a business and keep good records, everything you need should be easily accessible. Your accountant can provide you with a lot of the information.
The use of accounting software is essential and can place reports at your fingertips.
Don’t Get In Over Your Head
Regardless of the type of small business loan you apply for, the following documents will be needed. Be realistic on how much you can afford to borrow, and get prepared to justify why you need the funds.
Don’t get into a position where you are so desperate for a loan that you accept an offer with less than favorable terms. There are a lot of new trends in lending for small businesses. Not all of them will help you reach your goals.
When looking at alternative lending methods ask for the interest rates and repayment terms upfront.
1. Number of Employees
Communities applaud small businesses that provide jobs for people within the local area. Having a business that has grown to a level where you are hiring new employees is a good reason to need a loan.
There are different criteria for different small business loans. During the qualifying stage, you will need to meet the small business size standard. This is a table used to determine the number of employees a business should have based on the industry.
For this purpose, an employee is anyone classified as full-time, part-time, permanent, temporary or seasonal. It can also include individuals coming in from a temp agency or as part of a Professional Employee Organization (PEO).
Too many employees can move you out of the small business classification.
2. Estimated Business Revenue
The(NAICS) is Bible for business classifications. It is used by the SBA in determining if an industry qualified as a small business. Two ways they do this is by the number of employees and the estimates business revenue.
This does not mean your business has to be earning this amount. The information is used to assess the profitability of a business. The SBA has an online calculator for this purpose. Based on the industry code you will be asked to enter the number of employees you have or your annual revenue.
The results will tell you if you meet the requirements or not. If you do not know the six-digit code associated with your business, you can locate it in the NAICS index.
3. Net Worth of Your Business
Do you know what your businesses net worth is? If someone wanted to buy your business today, how much would you sell it for? Small business loan requirements include knowing the answer to these questions.
To get the classification of a small business your net worth cannot exceed $15 million. You may be thinking, if my business is worth that much, why would I need a loan.
Net worth isn’t just cash-on-hand. To understand your net worth you will need to calculate the value of your assets and then subtract your liabilities. If you own a fleet of trucks, those are assets, but if you are leasing the trucks they go under liabilities.
One way to increase the equity in your company is to reduce or limit your liabilities.
4. Your Personal Credit Score
Owners believe having a business that is turning a profit and paying their bills on time is enough to secure a loan. Having poor personal credit will impact your chances of securing an SBA Loan.
Most legitimate lenders are going to require you to have a personal credit score in the high 600s.
If you know your credit needs help, now is the time to start working on improving it. Get your free credit report from the three main credit bureaus. Pay-off outstanding debt and dispute anything you feel is incorrect.
Information remains on your report for seven years after you pay off the balance or the creditor writes it off. A bankruptcy is reported for 10 years.
5. Your Business Credit Score
Most people will not have a business credit score if they are not incorporated or have been issued an Employer Identification Number (EIN). For those that have taken the initiative to legalize their business, they can begin to build a business credit file.
The way to build your score is by opening a business bank account and having a business credit card issued. Check with your suppliers to see if they offer a line of credit. If so, open one and use it regularly, then pay-off the balance at the end of the month.
Once you have established a business credit history, you can check your score with Equifax, Experian, and Dun & Bradstreet.
6. A Professional Resume and Business Plan
A professional business resume is similar to a resume you would create for a job. The difference is, instead of tailoring it to impress a potential employer, you’re trying to impress a potential lender.
Your business resume will include an introductory statement outlining your objectives for the loan. You will highlight your relevant business experience, including past work experience you use to operate your business. Like a career resume, you will list your education, certifications, and volunteer opportunities.
Include the resume with your business plan, which is a small business loan requirement.
Before starting a business every entrepreneur should create a business plan. This is where you define the objectives for your business and competitor analysis. It will also include your marketing strategy and your three, five, and 10 years goals.
If you’re adding to an existing business plan, plug in information about the state of the company today.
7. Tax Returns
Similar to your credit scores, small business loan requirements include both your personal and business tax returns. You will need the returns for the prior three tax years. This is one reason why it is so important not to co-mingle personal and business finances.
Your personal returns will show that you are paying yourself a salary. The business return will show the losses or profits for each year.
8. Schedule of Business Debt
This is where you outline your debt for the lender. The purpose of the schedule is to help the lender assess your ability to repay the loan. Make sure you include everything.
Notate the items that you want to pay-off with funds from the loan. This may help your case and show that you are not taking on new debt.
9. A Balance Sheet
Your balance sheet is accessible through your accounting software. If you are not using an accounting application, it is a good idea to start looking into one. They make pulling your balance sheet easy.
The balance sheet gives you a quick look at your business finances. You can see your assets in correlation to your liabilities. It also provides a side-by-side of your current accounts payables and accounts receivables. Plus, your YTD income and outstanding receivables.
10. Bank Statements
In business loan requirement number five we mentioned the importance of having a bank account. Not only will you need one to build your business credit score, but you will also need to provide bank statements for your loan.
It is very convenient to go paperless when it comes to monthly statements. When you open your bank account ask how long statements are available for download. One of your requirements could mean producing a year’s worth of statements.
For convenience, download your statements each month so they are readily available.
11. Profit & Loss Statement
A profit and loss statement measures the financial health of a business. You will need to show all sources of income for a specified period, as well as the expenses paid. When the expenses are deducted from your revenue the difference will show either a profit for that period or a loss.
Your profit and loss statement will cover a specific period of time. It can be for 90 days, 180 days, or a year. Those time periods can be for the current year or a prior year.
The lender will specify the dates for you, so make sure you can access your records quickly.
12. Collateral to Secure the Loan
Yes, after providing all of the required documents to get a loan, you will still be required to secure your loan. Some examples of collateral can include the house you own, your business office, warehouse, or equipment.
For those in construction, collateral could mean securing the loan with the property you are building on.
13. A Personal Guarantee
The maximums on SBA Loans can range from $50,000 on a microloan and up to $5 million on other loans. The interest rates will be lower than loans offered by lenders, not in the program. You will also get a longer and more user-friendly repayment period.
Even with government backing the lender is taking a lot of risks and need reassurances that you will not default on the loan. If the collateral is not enough to satisfy the balance, the SBA and the lender can go after your personal assets.
There is no set limit to what assets are open to seizure. Each owner with a minimum of a twenty percent stake in the business is required to sign the personal guarantee.
14. Supporting Documents for Purchases
There is a reason you are seeking a small business loan. Requirements for a business loan will also mean justifying why you need the money. If there are specific purchases for equipment, property or to make new hires, you need to outline the expense.
Supply supporting documents to show the cost of each item. Are you buying new, used or leasing? Will you be trading in an older model?
In instances where you’re bringing on new staff, you will have to show there is a need for expansion. Include the job titles, pay rates and any benefits the employees will receive.
15. How long you’ve been in Business?
The length of time you have been in business will play a part in getting approval for a business loan. There needs to be a strong history that shows growth especially for businesses that have employees.
According to statistics, nearly seventy percent of all businesses fail by their tenth year when they employ other people. This is why you will need to have a business that has managed to keep its doors open for more than five years. However, the minimum requirement is two years.
Getting a loan will be complex the less time you have been in business but is not impossible. Depending on the type of business, you may be able to demonstrate that you have a plan for success.
Are You Prepared to Apply for an SBA Loan?
Some businesses aren’t prepared for the time when they will need a loan. Knowing how to qualify for a business loan before opening your doors can prepare you for meeting all of the requirements.
If you’re just starting out, click here to learn the benefits of legalizing your business with an LLC.