How Do You Qualify for a Small Business Loan? A Complete Guide for Entrepreneurs
Estimated Reading Time
Read time: 7 minutes
Key Takeaways
- Your business must be a for-profit company based in the United States.
- Evidence of financial need and eligibility is required.
- Make sure you have solid credit and complete documentation, and you should be just fine.
- It is really important to meet industry comparable size standards.
- Specific loan programs may have their own requirements or flexibilities.
Table of Contents
- Understanding the Basics of Qualification
- Basic Qualification Requirements
- Understanding Creditworthiness
- Business Longevity and Financial Performance
- Required Documentation
- Meeting Business Size Standards
- Special Considerations for Loan Eligibility
- Key Steps to Prepare for a Loan Application
- Frequently Asked Questions
Understanding the Basics of Qualification
Before we get into the nitty-gritty, let’s go over the fundamental requirements needed to qualify for a small business loan. Whether you’re going to a government-backed lender, such as the SBA, or a private lender, there are a number of commonalities in the types of things that you'll need to prepare.
Basic Qualification Requirements
In order to qualify for a small business loan, according to FNB247 and the SBA, your business must be for-profit, based in the United States. Your business must also meet the SBA’s or the lender’s definition of small business, which can vary based on annual revenue or number of employees. One other important condition is that you are unable to borrow in another place at terms that is fair. This is to verify that the loan is in fact necessary (source: SBA). Further, the loan proceeds have to fund a legitimate business use according to the SBA. Businesses in industries including gambling, sex-focused adult entertainment and others don’t qualify for the loans, NerdWallet reported.
Cashing in on Creditworthiness
Your credit score has a lot to do with your ability to qualify for a loan. If you’re looking for an SBA loan, you’ll need a score of about 690, although some lenders can work with lower scores, and for non-SBA loans some will accept scores as low as 500, WeFrontIt and NerdWallet report. It’s also helpful that you have your own solid business credit to back up your request.
Business Longevity and Financial Performance
Most banks and SBA lenders like to see businesses that have been in business for at least 2 years, stated NerdWallet. But there are also some online lenders that are much more flexible, with a three to six months old business is liable to be accepted depending on WeFrontIt. Showing your ability to generate revenue and maintain financial health is essential when applying for a loan.
Necessary Documents
You will need to submit several documents so that your loan request can be supported. Recent business and personal tax returns are standard requests, according to Bank of America. Additionally, its shared by FNB247 and WeFrontIt are comprehensive business financial statements and a clear business plan.
Meeting Business Size Standards
A small business that meets the SBA size standards is an equally important factor while applying for a small business loan. These requirements, along with others listing the number of employees and annual revenue are laid out in the SBA's Table of Size Standards, FNB247 said.
Special Considerations for Loan Eligibility
In addition to standard qualifications, there are a few special things to know about applying for a small business loan. It’s important, according to NerdWallet, not to be behind on existing government loans. Making sure your business is able to repay is key, as pointed out by the SBA and Bank of America.
Preparation Steps for a Loan Application
Being prepared can greatly improve your ability to qualify for a loan. Kick things off by checking up on eligibility criteria and all of the documents you will need, as stated by Bank of America and FNB247. Speaking with lenders or the SBA directly can help shed light on such eligibility concerns.
