Most agree, when you start wondering how to qualify for a business loan, the waters can become muddied with things that do not really matter. As a result, it can be hard to distinguish between what really matters, and what doesn’t.
How to Qualify for a Business Loan: What Really Matters?
Truly, there is a lot of conflicting information out there on how to qualify for a business loan. Is it business credit? Is it personal credit? What else makes a difference? Can you get a loan without business credit? Do you really need a business plan? What reports are they looking at? Let’s clear some of this up.
How to Qualify for a Business Loan: What You Don’t Know Can Hurt You
First, you need to know that there are probably a lot of things that make a difference in how to qualify for a business loan that you don’t even realize. At first glance, a lender is going to consider fundability. Usually, most borrowers think this has only to do with your credit score. However, there are many layers to fundability. Together, they can all make a difference in whether or not you are approved.
Find out why so many companies use our proven methods to get business loans.
How to Qualify for a Business Loan: Understanding Fundability
Not surprisingly, one of the main things about fundability that most business owners do not realize is that it actually starts with how your business is set up. For example, even the address and telephone number you use for your business can affect fundability.
Set Your Business Up to Be Fundable
To help, here are some things to consider when setting up your business to appear fundable.
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Contact Information
It has to be separate from your personal contact information.
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EIN
If you don’t know, this is the equivalent of an SSN for your business.
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Incorporate
It’s true, you have to incorporate as either an LLC, and S-corp, or a corporation.
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Business Bank Account
A dedicated business bank account is vital to fundability.
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Licenses
Make sure you have all the licenses you need to operate your business.
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Website
You need a professionally designed website and an email address with the same URL.
Honestly, this is a super simple summary. Get more details on how to set up your business to be fundable here.
Other Things that Affect Fundability
In addition to how your business is set up, there are about a million other things that can affect the fundability of your business. They can all be broken down into the following categories.
Business Credit Report
This is the credit report, much like your consumer credit report, that details the credit history of your business. It is a tool to help lenders determine how credit worthy your business is.
Where do business credit reports come from? There are a lot of different places. Still, the main ones are Dun & Bradstreet, Experian, Equifax, and FICO SBSS. Consequently, you have no way of knowing which one your lender will choose. As a result, you have to make sure all of these reports are up to date and accurate.
Other Business Data Agencies
There are other business data agencies that affect those reports indirectly. This is in addition to the business credit reporting agencies that directly calculate and issue your credit reports. Two examples of other agencies include LexisNexus and The Small Business Finance Exchange. They gather data from a variety of sources, including public records. What does this mean for you? It may surprise you, but they could have access to information relating to automobile accidents and liens, among other things. You cannot access or change the data the agencies have on your business. However, you can ensure that any new information they receive is positive. Enough positive information can help counteract any negative information from the past.
Identification Numbers
In addition to the EIN, there are identifying numbers that go along with your business credit reports. You need to be aware that these numbers exists. Some of them are simply assigned by the agency. One, however, you have to apply to get. It is absolutely necessary that you do this.
Dun & Bradstreet is the largest and most commonly used business credit reporting agency. Every credit file in their database has a D-U-N-S number. To get a D-U-N-S number, you have to apply for one through the D&B website.
Business Credit History
Your credit history has everything to do with all things related to your credit score. Of course, this is a huge factor in the fundability of your business.
Credit history consists of a number of things including:
- How many accounts are reporting payments?
- How long have you had each account?
- What type of accounts are they?
- How much credit are you using on each account versus how much is available?
- Are you making your payments on these accounts consistently on-time?
Of course, the more accounts you have reporting on-time payments, the stronger your credit score will be.
Business Information
On the surface, it seems obvious that all of your business information should be the same across the board everywhere you use it. However, when you start changing things up like adding a business phone number and address and incorporating, you may find that some things get missed.
Find out why so many companies use our proven methods to get business loans.
This is a problem. A lot of loan applications are turned down each year due to fraud concerns simply because things don’t match up. For example, maybe your business licenses have your personal address but now you have a business address. That needs to be changed. Maybe some of your credit accounts have a slightly different name or a different phone number listed than what is on your loan application. Do your insurances all have the correct information?
The key to this piece of the business fundability is to monitor your reports often. When it comes to business credit reports, you can monitor through the reporting agencies directly, or save money here.
Financial Statements
First, both your personal and business tax returns need to be in order. Not only that, but you need to be paying your taxes, but business and personal.
Business Financials
Typically, it is best to have an accounting professional prepare regular financial statements. Having an accountant’s name on financial statements helps your business look more credible and legitimate. If you cannot afford it monthly or quarterly, then at least have professional statements prepared annually. Then, they will be there whenever you need them.
Personal Financials
Usually, this is just tax returns for the previous three years. That is the bare minimum you will need. Other information lenders may ask for include check stubs and bank statements.
Bureaus
There are other agencies that hold information related to your personal finances that you need to know about. Everyone knows about FICO. Your personal FICO score needs to be as strong as possible. It really can affect business fundability and almost all traditional lenders will look at personal credit in addition to business credit.
Other than that, there is also ChexSystems. They monitor bad check activity, and that can affect your bank score. If you have too many bad checks, you will not be able to open a bank account. That will cause serious fundability issues.
For this point, everything comes into play. Have you ever been convicted of a crime? Do you have a bankruptcy or short sell on your record? How about liens or UCC filings? This all affects fundability.
Personal Credit History
Your personal credit score from Experian, Equifax, and Transunion affects fundability as well. If it isn’t great right now, get to work on it. The number one way to get a strong personal credit score or improve a weak one is to make payments consistently on time.
Also, make sure you monitor your personal credit regularly to make sure mistakes get corrected and that there are no fraudulent accounts reporting.
Application Process
So much plays into this that you may not even think about. First, consider the timing of the application. Is your business currently fundable? If not, do some work first to increase fundability. Next, ensure that your business name, business address, and ownership status are all verifiable. Lenders will check that. Lastly, make sure you choose the right lending product for your business and your needs. Do you need a traditional loan or a line of credit? Would a working capital loan or expansion loan work best for your needs?
How to Qualify for a Business Loan: Choose the Right Product and the Right Lender
This falls into that application process section of fundability. You have to know what you need, what you are eligible for, and what type of lender will work best for your needs. This will help you know where to apply and what to apply for, so that you can have the best possible chance of qualifying.
How to Qualify for a Business Loan: Choose the Right Type Business Loan
When it comes to business loans, these are the general types of products available.
Traditional Loans
These are the standard loans that disperse as a set amount of funds, with the borrower repaying with equal payments over a certain period of time. These can be secured or unsecured.
Line of Credit
This is revolving debt similar to credit cards. Borrowers are given a maximum limit of the amount of funds they can use, but only pay back the amount that they actually use.
Invoice Factoring
Factoring invoices is an option if you have receivables. The lender basically buys unpaid invoices from you at a premium, meaning you do not get full value. However, you do get fast cash.
Merchant Cash Advance
If you accept credit card payments, a merchant cash advance can help you out in a cash pinch. It is basically just what is says. It’s a cash advance on predicted credit card sales. They base the amount of the loan on average daily credit card sales, and then take payment from future credit card sales.
Find out why so many companies use our proven methods to get business loans.
How to Qualify for a Business Loan: Choose the Right Type of Lender
A lot of business owners think that a bank is their only option. There are a few different types of lenders to consider however.
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Large Commercial Banks
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Community Banks
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Credit Unions
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Private Lenders
Of course, which one of these you use will depend on your specific needs and qualifications.
How to Qualify for a Business Loan: You Need an Awesome Business Plan
While there are forms available from most lenders for you to simply write in information related to your business plan, that’s not the best way to do it. A professionally written, complete business plan makes a far better impression on a lender. This is true even if you are an established business applying for a loan. The only difference is, you will write a plan for how you will use the funds in relation to your current business rather than a business you intend to start. In general, a complete and professional business plan contains the following.
Opening
First comes the opening. It includes an executive summary, a more detailed description of the business, and your strategy for getting started.
Market Research
Next, there is a section for market research. As you might guess, this section consists of market analyses including an analysis of your audience and an analysis of any existing competition. It will tell what need exists, how you will fill it, and how you will fill it better than the competition.
How to Qualify for a Business Loan: The Plan
This can also be broken down into two parts.
Plan for Design and Development
This is your plan from start to finish. It discusses what steps are you going to take. In comparison, this is more detailed than your strategies section.
Plan for Operation and Management
This is where a number of questions are answered in relation to the management of the business. For example, who will own or does own the business? Furthermore, who will run or currently runs it from day to day? It could be as easy as stating that you are the sole owner and operator. In contrast, it could be as complicated as laying out a complete partnership plan or board or directors’ format. Truthfully, it just depends on your specific business.
Financials
Lastly, this section includes current financials, projections, and a budget plan for the loan funds you are applying for. As you can imagine, lenders want to see that you know how to handle and funds you get. Furthermore, they want to know that you have a plan for paying them back.
Take note, if you are not a great writer, you may need to hire a writer to help you with this. If you have no clue how to do market research, you may need to outsource that piece as well. Thankfully, most small business development centers offer help with business plans also. Go here to find an SBDC near you.
How to Qualify for a Business Loan: Wrap Up
Hands down, the absolute first step in the process has to be to do an analysis of fundability. Then, you will know where you stand. As a result, you will have a better idea of what you may need to do to increase fundability. Also, you will have a better understanding of what type of lender you need to go with and which type of product will best fit your needs. Then, you can get to work on your business plan. Remember, while nothing is guaranteed, following these steps can help increase your chances of loan approval immensely.