When looking for a business loan, the first thing you need to do is find out if you are eligible. Every lender has its own set of eligibility requirements, so it is essential to know what they are before you apply. This article will discuss the most common requirements lenders look for in borrowers. So whether you are just starting your business or have been operating for years, read on to see if you qualify for a business loan!
How much money can you borrow with a business loan?
To determine how much money you qualify for, lenders will consider your credit score, annual revenue, and time in business. If you’re a startup or young business without much income, other factors might include your personal credit score and the amount of equity you’ve invested into your company.
Lenders want to see that lending to you is a safe investment with reduced risk potential. That means they need enough evidence that shows that giving out funds to help grow your business isn’t going to end up costing them more than they make in return from interest payments.
And this all comes down to eligibility requirements: whether or not a lender believes it’s worth their time working with someone like yourself based on what information we’re able to provide about our business.
So, what exactly are these eligibility requirements? And how can you make your business look as attractive as possible to lenders? First, let’s take a closer look.
What factors influence a business loan’s eligibility?
Credit score
One of the first business loan requirements is for the company and the owner to have excellent credit scores. Your credit score will give them a good indication of your financial reliability and what kind of risk you pose as a borrower.
Although minimum credit score requirements vary, some online lenders may approve you for a business loan with a personal credit score as low as 500. However, a traditional lender like a bank may require you to have a minimum score as high as 680.
If you have poor credit, don’t worry! There are plenty of lenders specializing in working with lower-credit borrowers and can still provide access to the funding they need for their business.
A business credit history is just as important (if not more so) than your personal credit score when applying for a business loan. Your business’s credit history can give lenders an idea of how reliable you are with making payments on time and whether or not extending you a line of credit would be worth the risk.
Annual revenue
This is another critical metric lenders will consider when evaluating you for a business loan. Annual revenue gives lenders an indication of how much money your company makes, on average, every year. If your yearly income is high enough, that means there’s a good chance you’ll be able to afford the monthly payments on your loan.
Time in business
This is another crucial metric lenders will consider when evaluating you for a business loan. The longer your company has been operating, the more data there is on how well it performs over time – and thus what kind of risk it poses to potential investors or creditors alike!
If you’ve only just started, don’t worry – there are plenty of lenders who specialize in working with newer businesses and can still provide access to funding for their business.
At a minimum, lenders will usually ask for four months of business bank statements to support the claims you’re making about your company’s financial history. If you’re applying for a small business administration loan or conventional bank loan, you should be prepared to provide even more bank statements.
One of the additional qualifications for a business loan may be for the company’s owner to provide a personal guarantee to their loan or pledge additional collateral such as personal real estate or other financial resources. Credit scores, annual revenue, business plan, and collateral are the four cornerstones of most business loan applications.
Collaterals
This can be in cash, stocks, bonds, equipment, or other assets. The borrower needs to pledge at least 51% of the total collateral value for availing of a business loan.
Personal credit score
Some lenders might consider this an additional metric when evaluating you for a business loan. Your credit score gives them a good indication of your financial reliability, as well as what kind of risk you pose as a borrower.
This is especially true for startups or new businesses, which might not have any revenue yet! If you have poor credit, though, don’t worry – there are plenty of lenders who specialize in working with lower-credit borrowers and can still provide access to the funding they need for their business.
What are the interest rates on a business loan?
Interest rates on business loans vary considerably, and both the bank’s risk assessment of your company (i.e., its creditworthiness) and the type of loan you take out have an impact on your interest rate.
For a small business loan, your interest rate could be anywhere from Prime + 0.50% to Prime + 11.00%, depending on your credit score and other factors.
The rates are generally lower for a large business loan, ranging from Prime – 0.50% to Prime – 0.75%.
There are also many variations within these ranges, so it’s essential to speak with a banker to get an accurate interest rate quote for your specific situation.
In general, banks tend to charge lower interest rates for secured loans than unsecured ones because a bank has less risk if it takes a secured loan.
What are the loan terms?
The term of a business loan is the amount of time you have to repay the loan in full. The most common terms for small businesses range from one to five years, though some lenders will offer longer terms.
The term of a small business loan can vary depending on the size and purpose of your loan, as well as the lender’s terms, but generally, it will be somewhere between one and five years.
Similarly, if you were planning on using your business equity line for expansion purposes only and needed funding in three years (to cover building costs), this would mean having enough cash flow from operations to cover those costs within that timeframe. This also assumes all other business expenses were covered (i.e., payroll, rent, utilities, etc.).
You may need to obtain additional financing during this period if your operations are not generating enough cash flow to cover these costs on their own (this could be via loans from banks or family members).
The more money you have available upfront before applying for a loan, the more likely you will be approved and receive a lower interest rate. This is because you’re seen as less of a risk to the bank.
What are some tips on how to improve your business’s eligibility for a loan?
- Have an updated business plan and financial statements ready.
- Make sure your credit score is in good standing.
- Come up with collateral to offer as security for the loan (this could be anything from personal assets like stocks or bonds, real estate property, etc.).
- Use a business line of credit instead of a term loan when possible. The interest rates on these tend to be lower, and there aren’t any penalties for early repayment. You also don’t need to provide collateral with this type of loan.
- Make sure your business has been operating for at least six months (this is especially important if you’re applying for a new company). It shows banks that there’s already some sort of track record behind it, and they’ll be less likely to see it as a high-risk investment.
- Be prepared to answer any questions the banker may have about your business and submit all required documents on time.
- SBA loans are usually a good option if you’re looking for low-interest rates, but they can be challenging to qualify for and require collateral.
What things should you avoid doing if you want to get a business loan?
- Don’t lie on your application or misrepresent your company’s financial situation.
- Don’t miss payments on any other loans you may have.
- Don’t withdraw all of your business’s assets and put them into your personal account. This will make it look like you’re in financial trouble and could jeopardize your loan application.
- Don’t co-sign a loan for someone else with your business name on it. If they can’t repay the loan, you’ll be responsible for it.
How long do you have to repay the loan?
The loan terms will dictate how long you have to repay it. Generally, business loans have a shorter repayment term than personal loans. You’ll want to make sure you’re able to repay the loan within the set time frame comfortably.
Small business loans can be a great way to get your business off the ground or grow it further. However, not all companies are created equal, and not all businesses will be eligible for a loan. There are certainly small business loan requirements that you must meet to qualify for a business loan.
Are there any fees associated with getting a business loan?
Yes, there are several fees associated with business loans. But the good news is that many lenders do not charge an application fee! The fees that you may encounter include origination fees, late payment fees, and early repayment penalties. There are also loan disbursement charges that some lenders can charge. For more information about these different fees, please consult with the lender with who you are interested in working.
Small business owners should expect to pay some fees when applying for a business loan, but it is essential to know precisely what you are being charged and why. This can prevent you from paying more than necessary in the long run!
Many lenders do not charge an application fee at all; however, different institutions may have other types of costs that could be incurred. Therefore, be sure to ask about any fees associated with the loan before signing any paperwork.
Are there any restrictions on what I can use my business loan for?
There are no restrictions on what you can use your business loan for. Unfortunately, many people think they are only allowed to use their business loans for certain things, but this is not true!
Business loans can be used for various purposes, including equipment purchases and working capital. If you want more information about the types of expenses that qualify as working capital, please consult with your lender.
What is the minimum amount that I can borrow?
The minimum amount you can borrow will depend on the lender you work with. Some lenders have a minimum loan amount of $500, while others have a minimum of $5000. It is essential to consult with your chosen lender to find out their specific requirements
In conclusion
To be eligible for a business loan, you must meet the lender’s requirements. These requirements may include having a good credit score, being in business for a certain amount of time, and demonstrating profitability. By understanding these requirements, you can increase the chances of your loan approval to grow your business. EdFed offers Business Solution programs that will help you have a higher chance of getting approved for a business loan.
