How Do You Qualify for a Small Business Loan?
You’ll need capital to cover expenses like product inventory, payroll, insurance and advertising when starting a small business. While drawing money from your personal savings is an option, most entrepreneurs lack the cash on hand to launch their business. Thankfully, there are loans available, but you’ll need to follow some steps to increase your chances of getting qualified for one.
Improve Personal Credit
When you apply for a small business loan, the lender will check your credit score and history. If you have bad credit — defined as a FICO score of 300 to 599 — you’ll struggle to get qualified for a loan. To build and improve your personal credit, use credit cards to make purchases instead of cash or debit cards. And when you receive the bills, pay as much as you feasibly can to keep the balances low.
Improve Business Credit
In addition to looking at your personal credit score, lenders will also look at your business credit score. Rather than using FICO, however, business credit reporting bureaus, including Experian and Dun & Bradstreet, use their own internal scoring system. The former uses Intelliscore Plus while the latter uses PAYDEX, both of which range from zero to 100. You can build your business credit by using credit cards in your business’s name to pay for expenses. Like personal credit cards, though, you should keep the balances low. Otherwise, they could hurt your credit score.
Prepare Documents
Obtaining a small business loan requires the right documents. If you show up to the bank with nothing more than a recent statement of your savings account, they’ll probably reject your loan application. Lenders want to know that you can pay back the borrowed money. To win their trust, gather a copy of your personal credit report, business credit report, last five years of tax returns and business plan.
Identify Loan Requirements
Different lenders have different requirements to qualify for a small business loan. If you’re seeking a Small Business Administration (SBA) loan, for instance, you’ll need assets to use as collateral and provide the lender with a personal guarantee.
Don’t let insufficient cash flow prevent your small business from succeeding. By planning ahead, you can increase your chances of qualifying for a loan.