Unless you plan on bootstrapping your small business via your savings account, you’ll need to explore other avenues for financing your company. While some entrepreneurs decide to solicit investors to back their businesses, many others end up applying for loans through either traditional or online lenders. This influx of cash can help with costs like inventory, equipment, payroll, and many more — depending on the exact terms of the loan(s) you choose.
It’s only natural to wonder before you apply for a small business loan whether you’re eligible. The answer, of course, is that it depends on both the loans you choose and your credit standing, among other factors.
Here’s more on how to determine your eligibility for a given loan before submitting an application.
Qualifying for an SBA Loan
The U.S. Small Business Administration (SBA) backs certain loans dispensed by private lenders under its 7(a) program. These loans tend to be competitive, mainly due to their desirable repayment conditions and their specific requirements to qualify.
According to the SBA, eligibility requirements are as follows:
- Businesses must operate for profit.
- Companies must operate in the U.S.
- Owners must have “reasonable equity” to contribute.
- Owners must have sought other avenues before turning to a loan.
As NerdWallet adds, small business owners must also be prepared to show exactly how they plan to use the funds. This speaks to the necessity of having a current business plan ready to submit to potential lenders. This will also help lenders ensure you will be using the funds as intended.
What Factors Affect Business Loan Eligibility?
A leading factor in whether or not you are eligible for approval on a small business loan is your credit standing — both business and personal. Many lenders establish a minimum credit score required to be considered for approval.
As one expert writes for Forbes, this required credit score can vary from loan to loan. Some more flexible lenders, like private online companies, may set their credit score minimums lower — perhaps even as low as 500. While this gives entrepreneurs with average or poor credit history a chance, the tradeoff is that the interest rate on these loans will inevitably be higher, making them ultimately more costly to repay. Some mainstream banks will set high minimum credit scores for borrowers, perhaps even just shy of 700. However, borrowers 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 company’s past and present financial performance, how much other debt you have taken out, 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 have to offer up a piece of property, like your car, as collateral against the loan. However, with this extra incentive for you to stay on track with repayment, lenders may be willing to approve you in a way they would not for an unsecured loan. Securing a loan with collateral can also help you get better interest rates than you otherwise would. A word of caution, though: Make sure you have an ironclad plan for paying back the loan, lest you further damage your credit and risk losing your collateral.
Figuring out whether you are eligible for a small business loan, regardless of lender or SBA backing, 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 you’re likely to get based on your credit score, financials, and needs.