How to Qualify for a Small Business Loan?

Published on: 07/19/2022

Going into debt for your small business is not a good idea. However, getting a loan is the only option to hire fresh talents, purchase significant inventory, expand your business’s physical location, or do anything important without working capital. Otherwise, your company’s growth will stagnate, and its chances of survival soon will be slim.

However, only some businesses are eligible for a small business loan. As a result, before applying for a small business loan, you should know a few basic requirements. What exactly are those terms? Let’s have a look.

A Brief Guide to Small Business Loan

Loans are a lifeline for small companies in difficult times. They allow you to take advantage of growth and development opportunities without diluting your ownership. Moreover, it benefits the creation of a future line of credit and the improvement of business cash flows. Unsurprisingly, you’re considering getting a small business loan and want to apply for one. But did you know some requirements exist for obtaining a small business loan? You should also be aware of other important things about it. Don’t worry; this guide covers everything from minor to prominent aspects that will assist you in qualifying for a small business loan

What Is a Small Business Administration (SBA) Loan?

The Small Business Administration (SBA) of the United States is a federal agency. It backs loans made to small businesses like yours through commercial lenders. A commercial lender, such as a bank or a credit union, will grant the loan to you. The SBA will cover a specific percentage if you default on the loan.

What Are the Basic SBA-Backed Loan Requirements?

If your company wants a small business loan, then it must

Be a small business, as specified by the SBA. Visit the SBA website to see whether your company fits the definition.
Possess a satisfactory threshold of share capital.
Be based in the United States or on US territory.
Have exhausted all other financial options, such as the owner’s assets.
Legally registered as a sole proprietorship, partnership, limited liability company (LLC), or corporation.
Its primary objective is to make profits.
Other criteria vary based on your loan type and lender.

What Businesses Qualify for Small Business Loans?

According to SBA 7 (a), eligible businesses include the following:

Retail shops
Professional services like accounting and legal
Restaurants and bars
Farms and agribusinesses
Licensed healthcare facilities, namely hospitals, nursing homes, clinics, dental labs, medicals, emergency outpatient centers, etc.
Franchisees of businesses mentioned above.

What Businesses Do Not Qualify for Small Business Loans?

According to SBA 7 (a), illegible businesses include the following:

Businesses with the primary source of revenue as gambling.
Real estate companies that trade in properties for investment purposes.
Businesses that are built upon pyramid sales schemes.
Religious organizations.
Charitable/Non-profit organizations.
Businesses engaged in illicit activities such as adult entertainment.
Lending businesses such as banks, credit unions, and other financial institutions.

Essential Prerequisites for SBA-Backed Loan

There are specific prerequisites that your business must meet to be eligible for small business loans. These criteria include the following:

Business Experience

Your business must have proven industry experience. If you are new to the sector, your loan is more likely to get rejection by SBA-backed lenders. For instance, if you want to open a café but have no experience in the food sector, you are unlikely to be approved for an SBA loan, regardless of whether you meet the other conditions.

Sufficient Revenue

Your company must have operated for at least two years and generate appropriate cash flows. As per industry norms, the lender will consider annual revenue. Some lenders also take into account monthly earnings. Lenders will demand a bank statement, profit and loss statement, and income tax returns to verify your business’s earnings.

Business and Personal Credit Scores

The lender evaluates business and personal credit scores to determine loan acceptance or rejection. A strong credit score increases your chances of loan acceptance and guarantees a lower interest rate for your business. Alternatively, a low credit score might result in loan rejection. When determining a personal credit score, lenders usually apply the FICO model with a range of 300 to 850. A credit score of less than 580 is considered poor, while a credit score of more than 670 is considered excellent. Similarly, lenders often use a Dun & Bradstreet (D&B) PAYDEX model ranging from 0 to 100 for business credit scores. Under this model, a score of 80 or more is deemed strong, while a score of 50 or lower is considered harmful.

Collateral and Personal Guarantee

A lender offers two kinds of loans: secured and unsecured. An unsecured loan is less than $25000, according to an SBA 7 (a) program. For an unsecured loan, your small business does not need to provide any collateral. However, a lender will demand a personal guarantee from someone in a key management position with at least a 20% share in your business. Giving a personal guarantee implies putting your assets and credit score at risk if your business fails to repay the debt.

Similarly, under the SBA 7 (a) program, a secured loan must exceed $350,000. You must provide collateral up to a maximum loan amount for a fast loan. Some examples of collateral include office equipment, inventory, machinery, accounts receivable, a second house mortgage, and so on. However, if you need a business loan to acquire a commercial building or a commercial car, the item you buy for your company will serve as collateral.

Also Read: How to Get Funding for Your Small Business in the United States

Business Plan

Specific lenders will need you to provide your business plan. This is especially true if your company is a start-up. Your business plan must include a competitive analysis, an apparent reason for spending the money, an industry outlook, and a monetary prediction.

Does Your Business Qualify for an SBA Loan?

Even though your small business meets all the SBA loan standards, it may or may not qualify for a small business loan, depending on varying lender requirements. So before applying for an SBA loan, work on the above criteria, like credit scores and business experience. You may increase your odds of receiving government grants and loans by earning a Cocolevio^Certify certification from a credible provider such as Cocolevio. The certificate will also help attract customers willing to support small businesses. Our small business guide will help you learn about the certification process for your business. You can contact the Cocolevio team today to increase your chances of getting a small business loan with a certification for your diverse small business.