How do you qualify for a small business loan?

posted by 2 weeks ago in Features
how do you qualify for a small business loan

Top tips on how to qualify for a small business loan

Looking to see if you qualify for a small business loan? Read our guide to help you understand how to qualify for a small business loan.

Applying for a business loan can be slightly daunting. There are so many options available and knowing which one is best for your small business can become a bit of a mind field.

Here we help you understand how to get a business loan.

How do you qualify for a small business loan?

Whether you’re looking at borrowing from a traditional high street bank, an alternative lender or a private equity firm, these tips help define a to-do list that will assist you in obtaining the cash you require to take your business to the next level.

  • Business credit score
  • Understand the lenders loan criteria
  • Collate business finance documents
  • Write a strong business plan
  • Estimate your commercial asset value

Let’s take a look at each section in more detail to help prepare you for your application.

How does your business credit score affect your business loan application?

Your business credit score will generally form part of the lenders decision who they check to see if you qualify for a small business loan. Business credit scores work in a similar way to personal ones, you can use a credit checking service, such as experian to gain access to your business credit report and gain an understanding of your business profile. You’ll be able to see your business credit score in real-time and see what’s impacting your score. This is invaluable data and allows you to focus on areas that may need improving. More importantly, you will be able to see exactly what a lender sees when they perform a company credit check.

Your business credit score will be a deciding factor in what credit lines will be available to you, it will also determine the interest rate set against your business loan, which in turn impacts your monthly repayments. The better your credit score, more opportunities will be available.

Having no or a lower credit score does not necessarily mean that you won’t be able to obtain a small business loan. There are hundreds of lenders out there and that’s where comparing business loans online can ease the pressure of applying for business finance.

What are lenders looking at when qualifying your small business loan application?

Understanding the lenders loan criteria, therefore to help you make a decision as to whether you can satisfy their requirements. It’s key to understand this.

Lenders will generally want to gain an understanding of your business, how it’s performed to date and your business plan going forward. It’s worth having the following information to hand before applying for a small business loan.

  • Capacity, can your business afford to make the monthly repayments
  • Business financial situation, annual turnover, profit and loss, balance sheet
  • Assets, what’s the value of your business assets
  • Business plan, covering a summary of your company, your product, market reach, team size and financials
  • Accounts receivable and payable, what is your business creditors and debtors value
  • Financial statement or audited accounts, this gives banks an overview of your businesses financial affairs
  • Personal financial details, ensure you have all your own finances in hand and the details ready to provide

Lenders have their own set of criteria when qualifying your small business loan application due to the way they risk manage their applicants.

What documents do I need when applying for a small business loan?

You’ll typically find that banks and alternative lenders ask for a wide range of documents to support your loan application. The more information you can gather to help you qualify for a small business loan, will assist the lender in building a clear picture of your business. Expect the lender to ask for any of the following documents:

Personal supporting documents:

  • Identification, passport or driving license
  • Proof of address
  • Bank statements

Business supporting documents:

  • Bank statements, this could range from providing 3 to 6 months
  • Financial statement or audited accounts
  • Business finance information, profit and loss reports, balance sheet or cashflow forecast
  • Business plan, this should include details on what you intend to use the funds for
  • Details of business incorporation

The requirements will be highly dependant upon the age of your business, loan amount requested and the term you wish to repay over.

Write a strong business plan

Your business plan should be water tight and thoroughly thought through, because a solid business plan shows you’ve taken the time to consider everything. Lenders need to see how you plan to use the money, the impact it will have on your business and more importantly your ability to repay. Include details on exactly what the loan is being used for and how you see this increasing profits.

First of all, create a list of what your business plan should include. We would recommend structuring your business plan to include the following information:

  • Company overview
  • What products do you sell or the service that you offer
  • Team structure
  • Industry analysis
  • Business facilities and your operation plan
  • Marketing plan and sales strategy
  • SWOT analysis – strengths, weaknesses, opportunities and threats

Your business plan should include details on the business’ current financial position and projected financials. You need to be able to clearly demonstrate that your business cashflow takes into consideration your outgoing’s, business expenses and the new loan repayment. This information is vital in helping the lender understand if you qualify for a small business loan.

Calculate your business assets

In instances where the lender deems your lending requirements as high risk, they are likely to request security against assets to the value of what you’re intending to borrow.

Assets can include items such as, commercial premises, equipment, machinery or inventory. This gives the lender piece of mind, that should you default on your repayments, action can be taken in order for them to recover the outstanding debts through taking ownership of your secured assets.

Ensure you have a clear outline of the assets your business currently holds and the estimated value of each. Should the lender decide to go down the secured business loan route, they will arrange for the agreed assets to be valued.

Finally, don’t be daunted by the process of applying for a small business loan. Here at Business Comparison, we understand both lenders and SMEs and offer a comparison service to help find the best loan deals for your circumstances.