Requirements to Get Approved for a Small Business Loan - Business.com

Requirements to Get Approved for a Small Business Loan - Business.com


Requirements to Get Approved for a Small Business Loan - Business.com

Posted: 02 Oct 2020 12:00 AM PDT

Getting a business loan in 2020 is no mean feat. Between the global pandemic and the ensuing economic slowdown, lenders of all stripes are worried about protecting their cash and keeping loans out of default. At the same time, millions of American businesses are struggling for the same reasons that are giving lenders pause, so millions are seeking funds at the same time lenders are clamping down.

With so much being asked of lenders, creditors are understandably worried about vetting potential borrowers in light of today's economic climate, so it can be tough to get credit. If you want to secure financing, it's critical to understand the requirements to get a small business loan before you ever apply.

Requirements by loan type

Loan type Biggest hurdle to qualifying
Term loan Time in business
SBA loan Application process
Business line of credit Generating sufficient free cash flow
Commercial property loan Building reliable business income

If you need financing for your small business, there are several different types of loans to choose from, and each has its own terms and requirements. Commercial mortgages, for example, usually have lower interest rates than lines of credit, but they also usually require a higher credit score. SBA loans are easier to qualify for than bank loans but have more substantial documentation requirements than most other forms of financing.

Besides, SBA loans are not supposed to be any borrower's first option. Applicants for SBA financing are supposed to have tried to get financing elsewhere first and been denied – so keep that in mind when deciding which loan is right for you.

Although requirements vary by loan type, you probably won't qualify for any type of business financing unless you meet certain minimum criteria. These include having a credit score of 600 or higher (640 for SBA loans) and a minimum debt-service coverage ratio of at least 1.15 to 1.3 – meaning that you should have at least 15% to 30% more free cash flow than what your loan payments will cost you every month. Online lenders like Rapid Finance might offer more flexible terms than conventional lenders, like banks or credit unions.

5 steps to qualify for a small business loan

In order to get a loan, small business owners have to follow a set process. When they apply for financing, borrowers have to supply a lot of information about themselves and their businesses so that lenders can assess their risk and creditworthiness.

Failure to take the right steps can damage business owners' credit and lower their chances of securing financing. So, if you want to get a loan, be sure to follow these steps.

1. Do your research.

Before you apply for a small business loan, it's important to research and understand the various types of loans available. You need to know the requirements for the types of loan that may work for you, as well as repayment options and what types of documentation will be required for approval.

2. Pick a loan.

Once you have considered various loans that may be suitable for your small business, decide which ones may work for you based on your business needs and desired repayment terms, as well as which ones you may be eligible for.

When deciding on a type of financing, be sure to consider loans with realistic rates and terms relative to your credit score and income – not with the best possible terms lenders advertise, which you may not qualify for.

3. Pick a lender.

After you know what kind of loan you want, you need to find someone to give you the loan. If you have an existing relationship with a bank or other lender, it's usually a good idea to look there first. If you don't already have a relationship with a lender, try to find one that specializes in the type of financing you want and offers repayment terms that will work for you.

4. Assess yourself.

When you've decided what type of loan you want and which lender you want to use, there's one last step before you apply – and that is to evaluate yourself as a borrower. Check your credit using Credit Karma or another tool, and examine your own financials to ensure that you have the credit score to qualify and can afford your payments.

When you check your finances, ensure that your income and expenses can be documented. If you can't document certain parts of your income, your lender may not be able to consider that income as part of your loan application.

Once you assess your credit and your finances, ask yourself whether you would approve your loan if you were a lender. If the answer is no, take steps to improve your credit for your finances before moving forward with a loan.

5. Apply for a loan.

Now that you've decided on a lender and evaluated your chances of being approved for financing, you need to file an application. This process varies from lender to lender but is usually pretty straightforward, involving several pages of paperwork.

You should be aware that your application for financing will require the lender to file for a credit check, which will affect your credit score. That's why it's important not to apply until you're ready, and to know what your lender will find when they review your application.

Also, when you apply for financing is when you can start incurring costs. As lenders have to run credit checks or assess the value of assets that you're borrowing against, you may start being charged fees. If you have to pause your application and start it again later, you may have to pay those fees twice.

6. Follow up.

Even after you apply for financing, your work may not be done. More often than not, you'll need to follow up with your lender to provide additional documentation or explain specific items related to your income, expenses, or credit score.

If all goes well, you'll get approved and close on your loan. If you want to get approved for another loan in the future, you'll need to comply with the terms of the loan, making payments in full and on time. You'll either need to pay off your loan on schedule or, if your loan isn't fully amortized, start looking for a new loan to refinance the balloon payment at least four to six months before your balloon payment is due.

Other financing options

If you need a loan for your small business, four of the most common options are bank term loans, SBA loans, business lines of credit and commercial mortgages. However, those options don't work for everyone. If you have poor credit or haven't been in business long, you may need to find another way to finance your business.

If you need more options, there are three main alternative types of small business financing.

  • Factoring: If your business regularly invoices clients and you want to get your money faster to grow your business, factoring may be a great option for you. With factoring, you can essentially sell your outstanding invoices (for qualifying clients) to get your money faster, and the factoring company takes responsibility for collecting payment from your client.
  • Business credit cards: Small business credit cards work just like personal credit cards – in fact, they're usually based on a business owner's personal credit. These cards can offer long 0% introductory periods and helpful rewards for businesses that need to finance routine purchases.
  • Personal loan for business: If your business doesn't have established credit or several years of revenue history, you may be able to get a loan based solely on the strength of your personal finances. With a personal loan, you can get financing without a lender having to consider your business finances. You'll need to sign a personal guarantee, but you would probably need to provide one with a business loan anyway.

Small business loan approval tips

With the economy still struggling in the aftermath of COVID-19 closures, millions of small businesses need financing to survive the slowdown. If you've found yourself in this situation, it's important to maximize your chances of getting the money you need.

Follow these tips to give yourself the best odds of approval.

1. Leverage your relationships.

When you start looking at loan options, don't be afraid to contact people you know personally at banks or other lending institutions. Working with someone you know won't guarantee that you get approved, but it can make the application process easier – and it helps to have someone who can vouch for your character when the lender is considering your application.

2. Optimize your personal credit.

When you check your credit before you apply for a loan, you'll probably find some negative items on your credit report. Whether it's outstanding credit card balances, a high credit utilization rate, or old credit accounts that have been closed but are still listed on your report, do what you can to improve those items. Your lender is eventually going to pull your credit, so it's best to address these issues yourself beforehand.

3. Come prepared.

When you're getting ready to apply for a loan, it's a good idea to gather all of your documents first. Your lender is going to ask for them anyway, and getting everything together before you apply will help your lender make faster progress on your application. It will also reduce the number of gaps or items that you need to clarify later.

These are some items to have ready before you apply:

  • Two years of tax returns
  • Your business balance sheet and profit-and-loss statement
  • Business operating agreements
  • Identifying and tax documentation for anyone who owns 20% or more of your business

4. Don't procrastinate.

Applying for a loan takes some time. Even after you get approved, you won't necessarily get your money right away, so don't wait until you need the money to apply.

If your lender asks for something to help complete your application, be sure to get it to them quickly. Lenders are usually trying to process many applications at the same time, and each time they have to wait for things from you, your application moves down in their pile.

5. Know your options.

The last piece of advice we have for borrowers is surprisingly simple, but it's one that business owners often fail to consider: Know what type of loan will work for you before you ask. Applying for the wrong type of loan can mean you get denied for financing and have to start the process over with a different loan type. This can hurt your credit or even lead to your business closing for want of money.

Small Business Loan Approval Rates Drop to Record Lows in April - Small Business Trends

Posted: 20 May 2020 12:00 AM PDT

According to a new index, small businesses are having a hard time getting the non government money they need from banks to stay open. This at a time when they need it the most.

Specifically, the small business loan approval rate dropped to 8.9% in April from an all time high (28.3%) in February.

That's the lowest approval rating for SMB's applying to big banks since The Biz2Credit Small Business Lending Index™ began the report in January 2011.

The news is no better with small banks. That approval rate has plummeted to 11.8% in April, down from 50.3% in February. The same goes for other lenders and even credit unions.



Biz2Credit Lending Index April 2020

"Institutional lenders may be shying away from lending to small businesses at the moment,"  Biz2Credit CEO Rohit Arora said in news release.

"They became important players in the small business lending marketplace because of relatively high yields and low default rates. Unfortunately, this is not the case right now."

The index reports even the approval rate among alternative lenders was low. This in spite of the fact these are often the people SMB's turn to for loans during hard times. The rate here was only 15.2% in April. That's down from 30.4% in March and a high of 60% in February.

Across The Board

This downturn is right across the board. It's not totally unexpected but still comes as a shock. Banks were lending money up until February consistently. The economy was strong and most indicators were good until COVID 19 struck.

Overall, bankers' confidence has been shaken by the unemployment spike caused by the coronavirus. As of early May, the rate had risen to 14.7%. That's from the low 4% where it had been for two years.

These numbers are outside the approval rates for the Paycheck Protection Program (PPP). The government approves those . Small business lending has been dominated by processing these loans recently. They come with a 1% interest rate and might be forgivable. That's outside the rates and requirements for more traditional loans.

PPP Loan Requests

"Smaller banks are overwhelmed by PPP loan requests," Arora said."Still the approvals for these are low."

Community banks are being asked to play a large role.

"We can expect this to continue, particularly since the PPP loans come with government backing."

Urgent Situation

He also stressed the situation was urgent.

"It's important to get capital to small business owners quickly," he said. ""We need to act to save America's small businesses."

For the Index, Biz2Credit looked at loan applications from businesses over two years old with credit scores above 680. The numbers come from over 1,000 small business owners who applied for funding on Biz2Credit's platform.

About Biz2Credit

Founded in 2007, Biz2Credit is responsible for more than $3 billion in small business financing. The company is using its industry-leading technology for digital platform solutions in financial institutions, with investors, and service providers. Visit www.biz2credit.com or Twitter @Biz2Credit,  Facebook, and LinkedIn.

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Image: biz2credit.com


FortisPay Buys Swype To Expand AP, ERP Capabilities - pymnts.com

Posted: 10 Jan 2021 07:04 PM PST

Fortis Payment Systems (FortisPay), which works in payment technologies for businesses and developers, announced that it had bought Swype at Work and also entered into partnership with that company's affiliate, Net at Work, an IT service management company, a press release says.

With the new agreement, the companies will expand more in North America's B2B market and offer new customized solutions for customers.

FortisPay boasts its commerce platform, Zeamster, which can help deliver multichannel experiences, cloud EMV with point-to-point encryption, a full recurring commerce functionality, integrated invoicing and cost optimization.

With Swype, Zeamster will be able to more fully expand, bringing those services to more business technology markets and helping to boost payment processes and overall business efficiencies.

FortisPay CEO Jimmy Nafso said the new agreement would be good for both companies.

"Today's announcement signals our further commitment to providing businesses, developers, and VARs with flexible payment solutions that are tailored to the way they work," said Nafso. "The Swype acquisition is as equally important as the partnership with Net at Work. Net at Work has the industry's most respected team of ERP and eCommerce specialists and will help us extend our value proposition to new markets."

Alex Solomon, Net at Work's co-president, said the new partnership would help due to FortisPay's experience.

"This is a particularly exciting development for Net at Work and our customers. FortisPay is the preeminent payment company in the SMB space serving all types of middle-market companies, they understand partner enablement and are a perfect complement to our broad ERP and eCommerce expertise," he said, according to the release. "Partnering with FortisPay gives our customers the benefit of their 20 years of payment experience and their customers the benefit of our extensive ERP and eCommerce expertise, allowing both to unleash the power of their business."

For companies in the AP and ERP spaces, the important thing is to keep up with digital trends to meet customer needs and also stay above fraudsters' schemes. PYMNTS writes that the key benefits of transferring operations to the cloud include faster returns on investment, faster implementation and cheaper entry costs.

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NEW PYMNTS DATA: THE DECEMBER 2020 SUBSCRIPTION BUNDLING REPORT 

About: The PYMNTS Subscription Bundling Report, surveyed a census-balanced panel of 2,962 U.S. consumers to gauge how their attitudes toward bundled subscription services have changed during the pandemic, especially those offered by companies in the streaming sector. The report also examines how the knowledge that a COVID-19 vaccine will soon be available throughout the U.S. could affect their perceptions.

Today In B2B: Orange Bank's SMB Takeover; EU Supply Chain Default Fears - pymnts.com

Posted: 07 Jan 2021 01:05 PM PST

Today in B2B payments, Orange Bank acquires the SMB neobank Anytime, while Europe braces for a wave of supply chain finance defaults. Plus, Udaan lands funding for B2B eCommerce technology, Kofax collaborates on AP automation and Bringg partners for B2B delivery.

Supply Chain Finance Firms Could See Spike In Defaults In Europe

As a leading European watchdog debuts more stringent standards, the financial institutions (FIs) that help support the continent's supply chains are set to encounter a dramatic rise in soured debts, Bloomberg reported. Diego Tavecchia, a representative of the EU Federation for the Factoring and Commercial Finance Industry, told the outlet that the new regulations might categorize 15 percent to 20 percent of invoices for which factoring firms are responsible as defaulted, tantamount to as high as €25.5 billion ($31.3 billion) in soured debts. The European Banking Authority (EBA) will begin requiring companies that provide loans in the region to follow a single definition for default this year, after it saw high variances in the ways they contend with basic banking issues, Bloomberg noted.

Orange Bank Buys Neobank Anytime To Serve SMBs, Professionals

Orange Bank has purchased the neobank Anytime, which focuses on small companies, independent professionals and associations, through a deal whose terms were not made known, according to a Wednesday (Jan. 6) announcement. "Anytime's entry into the Orange Bank family marks a new development opportunity for us in a high-value market segment while establishing strong synergies with Orange Bank and Orange," Orange Bank CEO Paul de Leusse said in the announcement. Orange Bank is now seeking to simplify financial management for small and medium-sized businesses (SMBs) and small offices/home offices (SOHOs) following its success in providing the general public with mobile banking offerings.

Udaan Raises $280 Million For B2B eCommerce In India

Indian B2B eCommerce platform Udaan said it raised $280 million in additional funds as of Wednesday (Jan. 6) from both new and existing investors, per a report in the Hindu Business Line. According to the report, Udaan plans to use the funding to reach out to more small businesses around the country, expand its selection of products and improve the user experience, along with bolstering its technology program and supply chain finance infrastructure and expanding its SMB financing capabilities. Co-Founder Amod Malviya said the company was "at the forefront of this uniquely Indian eCommerce opportunity" over the past several years and was working on an "India-first, mobile-first" approach to eCommerce.

Kofax, Microsoft Team On Enhancing AP Automation

Intelligent automation software provider Kofax will integrate its ReadSoft Online platform with Microsoft Dynamics 365, letting organizations enhance their procure-to-pay workflows and automatic mission-critical processes, according to a press release. ReadSoft Online, the release stated, is Kofax's Software-as-a-Service (SaaS) tool for invoice data extraction and automation of accounts payable (AP) services. The two companies combined will offer a new service for AP departments to help reduce invoice processing time by as much as 80 percent, the release stated. With the joint solution, they'll be able to automatically process invoice data in over 35 languages and hundreds of formats from Kofax ReadSoft.

Bringg Joins Forces With Uber In Retail, B2B Delivery Deal

Bringg is teaming up with Uber Technologies in a deal that will give corporate customers of the logistics software firm "seamless access" to Uber Direct drivers, the company announced on Wednesday (Jan. 6). The Chicago-based startup, which works with companies looking to roll out delivery services and improve online ordering, said the partnership will cover the retail and B2B sectors. The move comes as the delivery sector explodes amid surging demand triggered by the coronavirus pandemic, with a range of startups and established players scrambling to meet demand. Bringg said its new partnership with Uber will give its corporate customers greater control and input into the delivery process and the customer experience.

Read More On B2B Payments:

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NEW PYMNTS DATA: THE DECEMBER 2020 SUBSCRIPTION BUNDLING REPORT 

About: The PYMNTS Subscription Bundling Report, surveyed a census-balanced panel of 2,962 U.S. consumers to gauge how their attitudes toward bundled subscription services have changed during the pandemic, especially those offered by companies in the streaming sector. The report also examines how the knowledge that a COVID-19 vaccine will soon be available throughout the U.S. could affect their perceptions.

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