Many people wait until they’re actually applying for a business loan before considering whether they’re eligible.
Since most businesses need finance at some stage of their life cycle, it’s worth understanding the basic criteria lenders are seeking.
We’ll explore how to qualify for a business loan, and the preparatory steps to give yourself the best chance of success.
Qualify for a Business Loan in 5 Steps
(1) Building Your Credit Scores
For most loans, both your personal and business credit scores are going to be relevant. Here are the common factors which influence credit scores:
- Your payment history
- Amount of debt (credit cards, mortgage, other loans etc)
- How long you’ve had the credit for
- What type of credit are you using
- Have you recently applied for more credit?
Begin by using a paid credit score service to see where you currently stand, then work on improving the weakest areas by paying close attention to timely payments, minimising the use of credit, and improving your overall revenue and cash flow.
(2) Prepare Your Business Documentation
As part of their due diligence process, loan providers are going to require supporting documentation. Get this ready ahead of time because the very act of doing so will tell you if there are gaps to fill.
While all lenders are different, most will need the following:
- Your company tax returns for the past year
- Up to date business income statements and balance sheet
- Details of any asset you may be using as security, including titles of ownership
- Your articles of company incorporation
- Any business licenses and commercial leases
- Your business plan
- Personal bank information and statement of income
- Personal credit score
- Personal Identification i.e. drivers licence
(3) Create a Strong Business Plan
Lenders want to lend you money, after all it’s how they make their living. But they need to be confident of your ability to repay it before they’ll do so. One of the key ways you can demonstrate how you’re going to do that is with a business plan, which is effectively a roadmap of how you’re going to achieve your business goals and objectives.
There are many full articles about creating a business plan which would be worth researching, but for the purposes of securing finance it must include:
- What gap is your business filling in the market? What problem are you solving for your clients?
- Who is your target market, and how will you reach them?
- Who are your competitors and how are you going to outperform them?
(4) Collateral or a Personal Guarantee ?
The key requirement for almost any loan is going to be collateral, which means putting an asset on the line as security in case of loan default.
This may be a property, vehicles, inventory or manufacturing equipment which the prospective lender can translate into cash should you default on the loan.
Where business collateral isn’t available, lenders will offer the option of a personal guarantee, which means one or more directors can offer their house or another personal asset as security.
Personal guarantees are common enough documents but we do recommend caution when signing one. It can be all too common during the formative stages of a business for directors to put their family homes on the line without fulling acknowledging the implications of this, should the business not go to plan.
One option is to use personal guarantee insurance, which is a relatively new insurance product that can protect against a large percentage of an guarantee. This can be paid as a business expense and offers a lot of peace of mind for directors.
(5) Research the market to understand typical loan requirements
While the alternative finance market contains greater opportunities for easy finance than at any time before there are still certain minimum requirements which you’ll need to meet.
Typically, these would include:
- Business must be at least 1 year old
- Low Personal debt to credit ratio
- Loan Collateral in Place
- Cash flow forecast and business plans