As a small business owner, there will come a time when extra capital is needed in the form of a small business loan. Whether you need financing to manage gaps in cash flow or even expand your business, the process of how to qualify for a small business loan can be overwhelming and time-consuming.

By understanding what you need to qualify for a business loan, which type of loan best fits your business needs, and how to apply for small business financing, you can set your business up for success.

To help you get started, we’ve put together a comprehensive guide on how to qualify for a small business loan in just 7 simple steps:

1. Before You Apply, Make Sure You’re Ready to Seek Financing

The first step in your financing journey is to determine why you need a small business loan. This should be the first question you ask yourself. Some small businesses owners have very specific needs, while others have a range of functions that require working capital, such as expanding retail space, covering payroll, growing product offerings, and more. The reasons behind needing the money will help drive your financing route moving forward.

After you’ve determined why you need a small business loan, you need to consider how much financing your business needs and your capacity to repay the loan. You don’t want to make the mistake of borrowing more than you can afford to pay back. It’s good to go into the process with a ballpark figure in mind.

Speaking with a financial advisor may help you better understand your business’s financial health as well as determine how much you can afford.

The best way to determine an amount your business can easily manage is by reviewing your business qualifications, financial statements, and revenue flow. Make sure to do research beforehand so your loan advisor can better understand your financing needs to help you find the perfect loan. 

2. Work on Your Personal and Business Credit Scores

Credit scores are a major determining factor in evaluating if your business qualifies for a small business loan and the types of loans it can qualify for.

Since most small businesses don’t have a great deal of history, this means your personal credit score may be a greater focus for lenders over your business’s credit score. With this in mind, your focus should be on boosting your score before applying for small business financing.

There are many ways to boost your credit score, but a few options to start with are paying your bills in full and on time, asking for a higher credit limit, and resolving any inaccuracies on your credit report.

It’s true that the better your credit, the more options that may be open to your business, but your credit score isn’t the only deciding factor when your business is applying for a small business loan. Alternative lenders look at the overall health of your business and not just your credit score to determine if your business qualifies for a small business loan. This allows businesses with bad credit scores to still get funded. This is why alternative lenders can offer more flexible terms than SBA and traditional bank loans. 

3. Know the Minimum Qualifications and Requirements to Qualify

Typically, you will need to meet the minimum criteria to qualify for small business financing. These criteria can differ depending on the loan and lender type you use; however, it generally revolves around credit score, years in business, and annual revenue. While other factors such as industry, cash flow, and collateral can also come into consideration, especially when using an alternative lender that has more flexible options.

Understanding your loan type is crucial when determining qualification requirements.

For example: secured vs. unsecured loans.

Secured loans use company assets as collateral, which lessens the risk of the loan resulting in easier access to lower rates, flexible terms, and higher loan amounts.

While unsecured loans, on the other hand, don’t threaten your assets as collateral, you’ll generally have to pay higher rates/fees with a shorter repayment period. With this option, lenders will rely more on your credit history and other factors to determine if your business is creditworthy.

4. Determine Which Loan Type Meets Your Financing Needs

Now that you’ve determined what your business needs to qualify for a small business loan, your next step is deciding which financing option best suits your needs.

The financial market has grown beyond just a traditional bank loan and with that comes more options to choose from. Subsequently, you’ll want to compare options to find the best loan for your business. Here’s a list of the top small business loan options you should consider:

  • Bank Loan: A Traditional Bank Loan typically has the lowest rate and term options, but the strictest criteria when it comes to securing a loan. This type of lending deposits cash into your business bank account as a one-time sum that comes with repayment and interest fees based on your business qualifications. While this type of loan is preferred by small business owners, traditional bank loans are significantly harder to qualify for, have a long application time, require high revenue and excellent credit.
  • SBA Loan: SBA loans are small business loans that are backed by The U.S. Small Business Administration. These loans are funded through partners, usually, banks, who can distribute the funds when needed. SBA loans are repaid monthly with flexible terms and low-interest rates; however, they have strict standards and businesses must meet certain requirements to qualify. Such as operating as a for-profit company and being current on all government loans with no past defaults.
  • Term Loan: A Term Loan is a flexible option provided by an alternative lender. With both short and longer-term lending options, term loans provide small businesses with access to working capital quickly. Once approved, businesses can access funds in as little as 24hrs. Working with alternative lenders offers small businesses with bad credit scores and credentials the opportunity to easily qualify for a loan. Conversely, they may have shorter terms than a bank loan.
  • Line of Credit: A Line of Credit is a flexible funding option for small businesses that works on a revolving basis, giving your business access to working capital when it needs it and the ability to have the line of credit open when the business doesn’t need it. Similar to a business credit card, a line of credit provides you with an approved amount of working capital funds that you can draw on whenever you need it most. This can be a popular option to act as a cushion for cash flow during slow times or help build a safety net.
  • Asset-Based Loan: An Asset-Based Loan allows a business to secure a loan by using assets as collateral for working capital. Typically, this type of loan allows small businesses = to receive lower rates, as the collateral is secured with business assets they already have, making the loan less risky. The more liquid the asset, the less risky the loan.
  • Business Credit Card: Similar to a personal credit card, a Business Credit Card allows for ease of purchasing, payments, and invoicing through a line of credit that’s accessed through a credit card. A business credit card is one of the best flexible short-term loan options for small businesses, but it does come with higher requirements and can have higher rates if you’re not in a suitable range for the requirements.

5. Choose Between a Traditional Lender or an Alternative Lender

Now that you know what type of loan best meets your business financing needs, the amount it needs, and which loans it may qualify for, it’s time to determine what type of lender you want to work with. You’ll want to choose a lender that you think will likely approve your business loan application based on its qualifications and creditworthiness.

You can opt to work with traditional lenders such as banks or alternative lenders, like private financing companies. There are pros and cons to each choice, but in the end, it comes down to which lender best suits your business needs.

Pros and Cons of Using a Traditional Lender

Pros

  • Potentiall LowerRates
  • Longer Repayment Periods
  • Widest Variety of Business Loans Available
  • Traditional Banking Relationship

Cons

  • Requires Strong Credit
  • Requires Collateral
  • Strict Approval Process
  • Lengthy Application and Qualification Processes

 
Pros and Cons of Using an Alternative Lender

Pros

  • Less Stringent Qualifications and Requirements
  • Faster Approval and Funding
  • Wide Variety of Loan Options
  • Simplified Application Process
  • Accepts Lower Credit Scores
  • Low or No Collateral Required

Cons

  • Shorter Terms
  • More Frequent Payments
  • Potentially Smaller Loan Amounts

6. Gather Required Documentation

 Once you’ve explored the business financing options and locked in the type of financing and lender that works best for your business, it’s time to gather all financial and legal documents in preparation to apply for a small business loan.

Both traditional and alternative lenders require a range of paperwork during the application process. Be sure to inquire about documentation requirements to start preparations early and avoid any delays in approval.

Some documents you may need to qualify for a business loan include:

  • A business banking account
  • Business license
  • Business financial statements
  • Personal and business tax returns
  • Personal and business credit scores
  • 3 months of bank statements
  • Business legal documents
  • Detailed business plan
  • Form of identification
  • Collateral details (if required)
  • Existing debt schedule (if applicable)

7. Apply for Financing

The final step in how to qualify for a small business loan is completing the application process. The process for applying can vary, but overall, it’s pretty similar.

Use all the documents you gathered from the previous step to simplify the process, then submit your application. For most lenders, this can now be done online. It can take anywhere from 24hrs to 6 months to find out if you qualify, depending on the loan and lender you choose.

After you’ve been pre-qualified, you’ll speak with a business advisor about what options work best for your business. If you understand the repayment options and how much the business can afford, it will be easy to choose the best route for your business.

Finally, you’ve applied and qualified for a small business loan! The last step in this process is to discuss the timeline for receiving your funds. For most alternative lenders this transaction is fairly quick. However, it may take longer when dealing with banks and SBA loans.

Summary

 As a small business owner, it’s important to learn how to qualify for a small business loan. Ultimately, the financing from a business loan can help bolster cash flow and advance your business. It’s not the easiest process, but if you take the time to get your financials in order, the chances of getting qualified for a business loan will increase exponentially. Understanding the difference between loan options and how they will work best for you as well as comparing lenders to find the perfect fit will help you make an educated decision on your small business financing needs.