Small businesses control the United States economy accounting for 52% of all workers according to the data by the Small Business Administration. These businesses do so well in terms of chasing the “American dream” according to the Small Business Administration(SBA) because they quickly adapt to the changing economic climates and conditions.
According to the department of state, small businesses have grown in large numbers since the ’90s providing opportunities for people, especially minority groups and women. That’s why the Small Business Administration seeks to support these businesses in terms of financing them with loans.
The SBA sets rules for loans by its micro-lending institutions and community development organizations. It minimizes risks for creditors, thus making it easy for small businesses to get finances.
The SBA has set small business loan requirements for small business owners looking to expand and sustain their businesses. Having a consistent stream of revenue is imperative for growth. If you’re looking to obtain capital, find out if you meet small business loan requirements.
The first thing that lenders check for when small business owners request funding is their credit score. Your credit score evaluates your ability to repay your debts, so the higher your credit score, the better.
To qualify for an SBA loan, you’ll need a high business credit score. The business credit score depends on the individual lender and business features such as your income, cash flow, and time in business.
2. Business Financial Statements
Some of the business financial statements you’ll be required to submit when applying for a loan are a balance sheet and profit & loss statement.
A balance sheet shows how your business is progressing, and it gives the lenders insight on how you manage your business assets and liabilities.
The profit and loss statement shows your business revenues and expenses over a specific period. The report will show the lender that your cash flow is strong enough to cover any unforeseen issues that might affect your business.
3. Age, the Company, Has Operated
According to the US state department, most companies fail within their first year, therefore lenders look at how long a business through its bank accounts, have been open. The minimum age requirement for business is between 6 months and two years.
So the longer you have been in business, the better. Businesses that have operated for a long time are more likely to repay the loan in time. But if your company has worked for less than six months, there are other loan options apart from SBA loans.
4. Business Plan
A business plan is another essential small business loan requirement. A business plan is a document written to describe the nature of your business. It analyses your competitors, explains your product and services terms of any existing debt, history of your financial statement, and marketing strategy.
A business plan is, therefore, a perfect chance to convince your lender to give you a loan.
5. Income Tax Returns
Both personal and business income tax returns are a big part of your loan requirements. Creditors want to scrutinize your finances to see whether or not you’ll be responsible if you take a small business loan.
Creditors also use business tax returns to verify your business income. They will ask to see the past three years of personal and business income tax returns. You should then get these documents to qualify for a loan.
As a part of the small business loan requirement, you should be prepared to provide adequate insurance. The creditor will ask for guarantees such as personal funds or business funds, just in case your business fails.
If the creditor considers your loan higher risk, they’ll possibly request for a significant amount of collateral for your, but if your business plan and financial statements are robust, you won’t need to provide much guarantee.
A personal guarantee is a requirement necessary for all SBA loans. It is a signed promise to repay the loan with individual asset if the business fails to pay back the loan. When a company defaults on an SBA loan, the creditor will seize the surety or any business properties to refund the credit.
If those are not available, then the creditors will take personal assets such as cars and homes. So for those with more businesses, they must first sign a personal guarantee to receive a loan.
8. Small Business Size Standard
The creditors will require you to provide some of these things to very whether your business is indeed small.
- The number of employees- small business employees, are typically below 100
- Business net worth. It should range between $5-$15 million dollar
- Business revenue. It should be between $0.75 million to anything under $38.5 million.
So a small business owner looking to apply for a loan, you should provide the above information to the creditors
9. A Resume of the Business
A business resume is among the list of small business loan requirements. These documents give your creditors the history of your business and how secure your business is in the industry. Be sure to prepare this document adequately to qualify for a small business loan
It is also an excellent opportunity to show the challenges you endured and conquered in setting and running the business as this will increase your chances of getting a loan.
10. Legal Documents
You will also be required to provide some legal documents as a requirement for a small business loan. Some of these documents include business registration and licenses, franchise agreements, contract for commercial real estate or business tools, etc.
It is therefore advisable to keep these documents in order and submit when applying for a loan
Boost Your Chances by Knowing Small Business Loan Requirements
Setting up a business and running it can be challenging when finances are inadequate. As a part of SBA small businesses need to follow some of the small business loan requirements such providing legal documents, collateral, a business plan and the age of the company to qualify for a small business loan.
Be sure o check out our page for more financial tips for your business and much more.