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Qualifying for a small-business loan is easier when you’re prepared. Below is a to-do list that will help you qualify for the cash you need to grow your business.
Whether you end up applying for an SBA loan through a bank or opt for an online small-business loan, you should be familiar with the requirements of each lender. Knowing whether you meet its criteria before you apply will save you time and frustration.
How to qualify for a small-business loan
1. BUILD PERSONAL AND BUSINESS CREDIT SCORES
Your personal credit score ranges from 300 to 850 (the higher, the better), and evaluates your ability to repay your personal debts, such as credit cards, car loans and a mortgage. The FICO score, commonly used in lending decisions, is based on five factors: your payment history (35% of your score), the amounts owed on credit cards and other debt (30%), how long you’ve had credit (15%), types of credit in use (10%) and recent credit inquiries (10%). Small-business lenders require a personal credit score for loan applications because they want to see how you manage debt.
Paying your bills on time is crucial to building your score. But even if you pay your bills like clockwork, credit report errors could be damaging your score. One in 4 consumers identified damaging credit report errors, according to a 2012 study by the Federal Trade Commission. However, 4 out of 5 consumers who filed a dispute got their credit report modified, the study found. A follow-up study by the FTC found that 20% of those consumers saw a jump in their credit score after resolving errors. You can get a copy of your credit reports for free once a year at AnnualCreditReport.com and dispute any inaccuracies you find through each of the credit bureaus’ websites (Experian, Equifax and TransUnion).
Businesses that are more established and want to apply for bank loans can check out their business credit scores (which generally range from 0 to 100) at three business credit bureaus: Experian, Equifax and Dun & Bradstreet. Check out these five steps to building business credit, and if you see any mistakes on your reports, contact the bureaus.
More than likely, you’ll need an excellent business credit score as well as good personal credit to qualify for an SBA loan or traditional loan from a bank; this will depend on the individual lender and business factors such as your revenue, cash flow and time in business. In general, online lenders look at personal credit scores but can be a bit more lenient when it comes to credit score requirements, as they place more emphasis on your business’s cash flow and track record.
If you’re looking for the best financing for your business, take our quiz to find your options.
2. KNOW THE LENDER’S MINIMUM QUALIFICATIONS AND REQUIREMENTS
Meeting a lender’s minimum qualifications and requirements will make you a stronger applicant. Some lenders may offer some flexibility if you’re underperforming in one area but overperforming in another, but your best chance of getting approved is meeting or exceeding all of their minimums.
Borrowers typically need to meet minimum criteria related to credit scores, annual revenue and years in business. And lenders generally frown upon recent bankruptcies and other past delinquencies.
If you’re looking for loans backed by the U.S. Small Business Administration, you have to meet additional SBA loan requirements. Your business must meet the SBA’s size standards because these loans are only for small businesses. Borrowers typically need to have strong personal credit and business revenue, and must be current on all government loans with no past defaults. So if you’ve been late on a federal student loan or a government-backed mortgage, you’ll be disqualified.
Your business must operate as a for-profit company and you can’t be on the SBA’s ineligible businesses list, which includes life insurance companies, financial businesses such as banks and real estate investing.
Qualifying for online lenders can be easier. Although online lenders typically underwrite loans based on traditional factors such as credit scores, annual revenue and cash flow, the loans carry less stringent requirements than SBA loans. For example, some online lenders may qualify you even without strong credit or an established business, and the lender may be more lenient with a recent bankruptcy. On the downside, this speed and ease of qualification typically comes with a more expensive loan.
3. GATHER FINANCIAL AND LEGAL DOCUMENTS
Banks and other traditional lenders typically ask for a wide range of financial and legal documents during the application process. They can include:
- Personal and business income tax returns
- Balance sheet and income statement
- Personal and business bank statements
- A photo of your driver’s license
- Commercial leases
- Business licenses
- Articles of incorporation
- A resume that shows relevant management or business experience
- Financial projections if you have a limited operating history
These requirements can make getting a bank loan time consuming. That may not be an issue if you’re in the market for a long-term business loan to finance a major investment.
However, if you need money faster, online lenders may be a better fit, as they can provide a streamlined online application process with fewer documentation requirements and faster underwriting. If you have good credit and strong business finances, some online lenders may offer you rates comparable to those for bank loans.
4. DEVELOP A STRONG BUSINESS PLAN
Lenders will want to know how you plan to use the money and will want to see that you have a strong ability to repay. They may require a solid business plan that details the purpose of the loan and how you expect it to increase profits.
Your business plan should include current and projected financials, and clearly demonstrate that your business will have enough cash flow to cover ongoing business expenses and the new loan payments. This can give the lender more confidence in your business, increasing your chances at loan approval. Your business plan should include:
- Company description
- Product and/or service description
- Management team
- Industry analysis
- Facilities and operations plan
- Promotional, marketing and sales strategy
- SWOT analysis (strengths, weaknesses, opportunities, threats)
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