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Published November 02nd, 2016 by

5 Most Common Requirements of Lenders for a Small Business Loan

5 Most Common Requirements of Lenders for a Small Business Loan

More and more people are thinking of starting a small business. They are slowly getting rid of the employee mentality and starting becoming their own bosses. The problem with this is that the average American do not have the surplus money to start a business. Good thing, the government is helping finance small businesses through SBA accredited lending companies.

Another problem for most new entrepreneurs is how to be given the loan they need. As long as you meet and surpass the requirements, being approved for a small business loan can be possible. It won’t be easy and it won’t be quick, but your chances of being approved are increased.

Most SBA loan lending companies have the same qualifications and requirements. Here are the top five most common requirements.

Strong Credit

Credit score is what your SBA loan provider will check to know if you are capable of handling a big loan that you will need to start your business. Credit history is computed based on your payment history, new credit, length of credit history, debt amounts and credit mix. If you do not know your credit score, you can check it at MyFico.com at its calculators and educators tab.

You don’t actually need a strong credit score to start a business, but if you want to take out a loan you would need a high credit score. Unfortunately for those who want to start a small business, a high credit score it not always possible. It’s because most people that start a new business are those who got laid off and probably racked up a lot of debts. This is not always the case but it happens. If this is what happened to you, you might it find it harder to get loans from banks.

So what do you do if you don’t have good credit? Will you give up on applying for loans? You wouldn’t have to because other lending options are available for you. In this article, Busting the Myths About Getting Small Business Loans, it mentions that banks are not the only places you can get money from. Banks will look at your credit score, and if you have a low score, you can forget about your loan being approved. Fortunately you can loan money from alternative sources like platform lending, local vendors, internet lenders and other form of loans like home equity loan.

Firm Business Plan

Business plan is one of the requirements for SBA loan programs. But if you want to be approved. Don’t just submit any written plan. Make sure that the SBA loan company won’t be able to resist it. If you want what companies are looking for in a business plan, you can follow the standard set by the US Small Business Administration. They also offer free courses on how to write a business plan.

A business plan will not just help you get a loan from lending companies, it will also help you navigate your business once it’s off the ground. It can serve as your map to a bright future. It will help you understand your business better. And it can guide you on what you have to accomplish in the future.

Your business plan can also help you map out a course of action that your business will take. By putting the plan in paper, you will be able to see which activities you should focus on to achieve success. If you have put milestones in your plan, then monitoring the progress and success of your business will be easier. It will also make delegating tasks easy because the plan will indicate who should do a specific task.

Another reason a business plan is important is it helps manage the cash flow from the business. If you have clearly indicated in the plan the cash projections, profits and loss, you would easily see where the money is going and coming from. This will help you keep your business from failing and it will also make sure that your debt will be paid in a timely manner. Include in the plan, what contingencies should be in place in case the projected cash are not met.

Outstanding Personal Resume

Lenders will not just look at your ability to pay your debts with your credit score but they will also look at your ability to run a business. They can gauge this with your experience and expertise. Your character will also be assessed to be sure that you will pay what you will borrow.

Like applying for any jobs, your resume should be compelling to the SBA loan provider. If you are appealing in paper, your chances of approval can also improve. Be sure to highlight your accomplishments, especially those that are relevant to the business you are planning to pursue. Edit your resume to be as up to date as possible. Check this to know more about how you can convince an SBA loan provider to finance your business.

Here are some elements that should be present in your resume to make it more outstanding:

  1. Objective statement. This is where you indicate what your objective is for applying for the small business loan.
  1. Highlight your relevant skills, but you could also put other skills that are not relevant. This can give your lender an idea on what you can and cannot do.
  1. Work history. This will show your lender what your experience is when it comes to the business that you are planning to build.
  1. Adding volunteer activities that you do can make you look better for the top SBA loan program you are applying for.
  1. Include all the education that you have gone through, whether they are relevant to your business and work history or not.

Exceptional Financial Statements

There are three financial statements that you would need when applying for a loan. They are not only requirements by SBA business loan providers, they are also important to your business.

  1. Balance Sheet. This is the document that will show the overall financial standing of your business. If the balance sheet is a formula, it will look like this: liabilities + equity = assets. This document details the balance between the income and expenses in a particular point of time. The loan you will be getting will fall under the liabilities. When making a balance sheet, make sure that both the assets and liabilities are equal or balanced.
  1. Profit and Loss Statement. This is sometimes called the income statement. The formula for this is gross profit – total expenses = net profit. This documents shows the gain and expenses in a particular period of time. When making this document, be sure that your net profit is not in the negatives.
  1. Cash Flow Statement. This refers to the document stating how much money is flowing in and out of the business. The inflow includes the accounts receivables, sales, investments and loans. While the outflow refers to the expenses paid, purchased equipment and other payments.

The SBA loan program will scrutinize your financial statements. They will look for reliability in your statements. These statements will show if you can and are able to pay your borrowed money based on what your statements say. There should be enough cash flow to pay off your loan. Your statements should also appear professional. It should not be hastily prepared and it should be accurate and complete. Another thing that lenders will look at is if you are being honest with the numbers you are putting in your statements. They wouldn’t know if you are lying, but once you are found out it will put a bad name on your business.

Try to check the reviews of SBA loan companies to know what others are saying about them.

Knowledge on What Kind of Loan You Need

There are different kinds of loan that the top SBA loan programs offer. There is line-of-credit loan, which is available if you need to buy inventory or you need to supplement your working capital. This loan should not be used to buy fixed assets like equipment and real estate.

Another kind is the installment loan where you pay back both the loan and interest in a monthly arrangement with your lender. This type of loan can be used for any business need that you might have. When the agreement is done and the contract is signed, you will get the full amount that you borrowed.

The third kind of loan that entrepreneurs should be aware of is the balloon loan. The way this balloon loan works is that you borrow the money but you only pay the interest during the life span of the loan. If your agreement was that you would pay it in six months, then for six months you would be paying the interest and then on the sixth month you would pay the whole of the money you borrowed.

Try to read SBA loan program reviews to know more about the company that you plan to borrow from. And before finalizing your loan application, consider these five things to know more about what type of loan you should get.

Still want to know more about the other requirements to apply for a small business loan? Check out specific companies and learn more about them at CrowdReviews.com.

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