Unless you plan to start your small business through your savings account, you will need to explore other avenues for financing your business. While some entrepreneurs decide to seek investors to support their businesses, many others end up applying for loans from traditional or online lenders. This influx of cash can help cover costs like inventory, equipment, payroll, and more, depending on the exact terms of the loan(s) you choose.
Before applying for a small business loan, it’s natural to ask yourself if you qualify. The answer, of course, is that it depends on both the loans you choose and your credit rating, among other factors.
Here’s more on how to determine your eligibility for a given loan before submitting an application.
Qualify for an SBA Loan
The US Small Business Administration (SBA) supports certain loans from private lenders under its 7(a) program. These loans tend to be competitive mainly due to their desirable repayment terms and specific requirements to qualify.
According to the SBA, the eligibility requirements are as follows:
- Businesses must operate for profit.
- Companies must operate in the United States
- Owners must have “reasonable equity” to contribute.
- Homeowners must have looked for other avenues before turning to a loan.
As NerdWallet adds, small business owners should also be prepared to show exactly how they plan to use the funds. This speaks to the need to have a current business plan ready to submit to potential lenders. It will also help lenders ensure that you will use the funds as intended.
What factors affect business loan eligibility?
One of the biggest factors that determines whether or not you qualify for a small business loan approval is your credit rating, both professional and personal. Many lenders set a minimum credit score required to be considered for approval.
As an expert writes for Forbes, this required credit rating may vary from loan to loan. Some more flexible lenders, like private online businesses, can set their minimum credit score – perhaps even as low as 500. While this gives entrepreneurs with average or poor credit histories a chance, the trade-off is that the interest rate on these loans will inevitably be higher, which ultimately makes them more expensive to repay. Some traditional banks will set high minimum credit scores for borrowers, perhaps even just under 700. However, borrowers who are able to qualify for these terms will benefit from low interest rates.
In addition to your business and personal credit profiles, lenders will also consider your business’ past and present financial performance, the amount of other debt you have incurred, and the strength of your business plan.
If you find yourself ineligible for more competitive loans due to your credit score or another disqualifying factor, consider exploring secured loans. You will need to offer real estate, such as your car, as collateral for the loan. However, with this added incentive to keep you on track with repayment, lenders may be willing to approve you in a way that they would not for an unsecured loan. Getting a secured loan can also help you get better interest rates than you otherwise would. A word of warning, though: make sure you have a rock-solid plan for repaying the loan, lest you do more damage to your credit. and risk losing your warranty.
Determining if you qualify for a small business loan, regardless of lender or SBA support, means doing your research to find the lender’s requirements and/or recommendations. This way, you can maximize your time by only applying for loans that you are likely to get based on your credit score, finances, and needs.