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As a small business owner, you may require a loan to cultivate business growth. But, navigating yourself through the business loan process can be daunting and difficult. First, you need to understand loan requirements for small businesses, then you need to find a solution that conforms to your needs.
Wise business owners explore the requirements and terms of the lending options available. There are several different types of small business loan products to choose from, though some options are more traditional, while others are more flexible.
Depending on the lender, some may be a better choice for your business than others. Each financing solution will have its own set of qualifying criteria, payment schedules, risks, and benefits.
Small Business Loan Requirements: What Is Required?
The typical go-to lenders include banks, the Small Business Administration, and credit unions, but the majority of small business owners are seeking alternative lenders to get the funding they need with more customized solutions.
Here is a look at how to get approved for a small business loan with each type of lender.
According to bloomberg.com, banks look for excellent credit, extensive financial history and collateral, making it difficult for most small business owners to qualify. Banks have also tightened their loan requirements for small businesses after the credit crisis of 2008, and have not altered them much since.
They focus their loan products on big business, which makes approval difficult for most small business owners.
Make Your Money Work For You With Alternative Lending
Don’t let the restrictions of traditional loans keep you from expanding your business.
What are the Bank Requirements for a Small Business Loan?
Generally, small business loans require the following:
- You need the flexibility of time. Loans can take 30-60 days to process.
- You typically need an excellent credit score and healthy balance sheet.
- You need to have been in business for at least three years and have documentation to prove your financial stability.
- The bank requires an extremely detailed business plan. They want to know everything about your business, marketing plan, and your tax and bank records. The process is rigorous.
- You need proof of collateral, or valuable property, is required for them to take if you default on the loan.
Small Business Administration (SBA) Loan
The Small Business Administration (SBA) is a government agency that can be helpful for some, but once more, you must be able to meet their requirements and you should be prepared that the process will take even longer than with a bank.
The SBA offers several loan products; general purpose 7(a) and 504 loan programs, for special purposes and business needs. The loans cover start-up costs for a business, business expansions or cash flow to keep a business running smoothly. The SBA does not issue the funding, but rather connects the borrower with one of their lending partners.
SBA Loan Requirements
Broadly speaking, SBA loans require:
- Good, solid credit and some collateral
- Time to process and get approval. You may need to wait up to 90 days or more to get your loan.
- Your resume, to look at your managerial and business experience
- A very detailed overall business plan that includes your past, present and future plans.
What are the Requirements for Credit Unions?
Credit unions are much like banks, but are privately owned by their customers in a nonprofit status. They offer small business loan products comparable to a bank.
Credit Union Loan Approval Requirements
Generally, credit union loans require:
- A good credit score, collateral and business plan is required, though the bar may be set a bit lower than most big banks
- Membership to the credit union. This means opening accounts with them and meeting their member qualifications.
- Time to process your loan, usually 30-60 days.
Requirements for Business Financing from Alternative Lenders
As a small business owner, you’ve probably heard about the power of alternative lenders (such as online lenders) as a way to meet the needs of your business.
Alternative lenders offer several funding options, focus on making qualifying easy, get you the money you need quickly, and offer flexibility in the terms and repayment schedule.
Examples of financing options from alternative lenders for small businesses include:
- Working capital loans
- Merchant cash advance
- Business line of credit
- Equipment financing
- Alternative long-term business loans
- Invoice factoring
Working Capital Loans
Working capital loans are short-term financing solutions. You can use these for your business with collateral assets to take care of immediate expenses and bridge cash flow gaps.
How Can Small Businesses Use a Working Capital Loan?
To best illustrate how you can use a working capital loan, take a look at this example: You have a private hotel that operates at full capacity for just a few months of the year, during the busy summer tourist season.
Shortly before the start of the summer rush, the hotel hires seasonal employees in preparation for the upcoming influx of guests. However, the hotel is still operating during the slow season, and you may find it hard to pay your bills while it’s quiet.
In this scenario, you can use a working capital loan to cover your costs of operations while you once again prepare for the summer rush — and summer cash — to start flowing.
Working Capital Loan Requirements
- You need to have been in business for a minimum of 6 months
- You need to demonstrate consistent financial revenue with 2 to 3 months of bank statements
- You sometimes need to show your business mortgage statement or business lease statement
- You need to fill out an application online
- You agree to a term length of financing for no more than 18 months
Merchant Cash Advance
A merchant cash advance is an alternative financing solution in which you sell a portion of your future credit card sales for cash that can be used immediately.
Merchant cash advances are solutions for businesses without leverageable collateral, such as service-based businesses.
How Does a Merchant Cash Advance (MCA) Work?
To better understand how an MCA works, take a look at how a local skincare seller may employ an MCA to fund increased production of a popular, in-demand product.
For one, you, as a business owner, recently made a popular product available to customers as part of a monthly subscription. The subscription sales have gone better than anticipated. As a result, you’re having a hard time keeping up with customer demand.
You need to increase production capabilities as soon as possible. However, you don’t necessarily have the assets you need. What you do have, however, is guaranteed future revenue.
An MCA is a desirable solution for this business owner. You can leverage future subscription charges for an MCA. This allows you access to the cash you need to immediately start leveling up your production volume.
Merchant Cash Advance Requirements
To qualify for an MCA, you generally need to:
- Complete an application form online in 10 minutes or less
- Have a 500+ credit score
- Been in business for a minimum of 6 months
- Demonstrate you have over $15,000 in monthly revenue
Business Line of Credit
A business line of credit is a revolving line of credit that you can hold onto and access only when necessary. It’s similar to a personal line of credit many residential homeowners have in case of unexpected home repairs or other emergency expenses.
Additionally, a business line of credit can help an emerging business establish good business credit.
You can also use it to cover shortages in cash flow. When dips in sales occur, you might use this option for paying for rent, utilities, vendor invoices, or other operating expenses.
Business Line of Credit Requirements
Generally, to get a business line of credit, you need to have:
- A personal credit score of 560+
- Been in operation for at least 6 months
- Over $50,000 in annual revenue
- A recent business tax return for lines of credit over $100,000
Your Money Should Work As Hard As You Do
Work with an alternative lender that understands the financial needs of growing businesses.
Equipment financing can help you purchase new equipment for your business when you might not have the cash on hand to buy what you need.
With equipment financing, you can both cover the cost of new equipment and gain capital assets. The loan amount would be similar to a traditional loan, but adhering to conventional small business loan requirements won’t be necessary—though you certainly need to meet the qualifications below.
What Types of Equipment Can I Finance?
Almost any type of equipment can be financed, including but not limited to:
- Manufacturing equipment
- Farming equipment
- Construction machinery
- Commercial vehicles
- Heavy duty machinery
- Computers and software
- Medical equipment
Equipment Financing Requirements
Most of the time, to qualify for equipment financing, you’ll need to:
- Apply online
- Have been in business for at least 3 months
- Provide accurate information about the equipment being purchased
Alternative Long-Term Business Loans
If you have an established business, alternative long-term business loans can help you if you need long-term financing but don’t want to go through a lengthy application process with a traditional lending institution.
These kinds of long-term loans are similar to traditional business loans for term and interest rates. However, with an alternative financing provider, long-term business loans are usually acquired faster. The loan application requirements can also be less strict.
Expand Your Business With a Long-Term Business Loan
Long-term business loans help your business move forward and expand operations. When you plan on expanding, you may be looking to:
- Purchase new equipment
- Onboard new staff
- Open a second location
- Scale production capabilities
- Offer new products and services
With a long-term business loan from an alternative financing provider, your growing business can get the money it needs without going through a lengthy and complicated application process.
Alternative Long-Term Business Loan Requirements
Most often, to qualify for a long-term business loan from an alternative lender, you’ll need:
- A good credit score
- To share annual tax returns
- To have been in business for 3+ years
Invoice factoring allows you to quickly access by leveraging value from unpaid invoices from your accounts receivable.
How Invoice Factoring Works
When you use invoice factoring, an alternative financing source buys your unpaid invoices for a little less than the total amount of the invoice. The invoice purchaser gives you the agreed-upon amount for the invoices and can declare the invoices as paid. The lending institution seeks full payment for the invoice from the customer.
Requirements for Invoice Factoring
Much of the time, to qualify for invoice factoring, all you need to do is provide some basic business information, the invoices, and we’ll get back to you in as little as four hours.
Understanding the Requirements for Approval: More Info on Small Business Loans from Credibly
When looking for funding to finance equipment or expanding your business, you need to learn about the different options available to you, and which is the best fit. Some loans are better suited to your needs than others.
Don’t Gamble On Your Business’s Future—Get the Funding You Need
Applying for a small business loan or financing doesn’t have to feel like you’re rolling the dice.
Talk to a financing expert to find out exactly what paperwork you need.
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