The Small Business Owner’s Guide To Business Loan Requirements & Qualifications
Applying for a loan can feel daunting. Here is a guide to the requirements and qualifications needed to acquire business funding.
If your business is ready for a loan, the first step is to know and understand basic business loan requirements.
In this post, we’re going to look at how lenders evaluate business loan eligibility and what documentation you need to gather so you can navigate the process like a pro and receive the funding your business needs.
Table of Contents
- How Lenders Use The 5 C’s Of Credit To Evaluate Loan Eligibility
- Small Business Loan Application Requirements
- Business Loan Requirements By Loan Type
- The Bottom Line On Business Loan Requirements
- FAQs: Business Loan Requirements
How Lenders Use The 5 C’s Of Credit To Evaluate Loan Eligibility
To mitigate the risks of lending, lenders use a system known as the 5 Cs of Credit.
The 5 Cs of Credit are:
- Character: Character is a measure of how trustworthy you are. Lenders can evaluate character using credit reports and scores, personal interviews, and/or personal references.
- Capacity: Capacity determines if you are able to repay the loan. Lenders use formulas like the debt service coverage ratio (DSCR) and debt-to-income ratio (DTI) to determine if you qualify for a loan and how much you can afford to borrow.
- Capital: Capital is the measure of how much money you have invested in your business. This shows lenders that you have something to lose if your business fails and are willing to make your loan payments to ensure the success of your business.
- Collateral – Collateral is business or personal assets used to secure your loan. This puts less risk on the lender, as the property can be seized and sold if you default on your loan.
- Conditions: The lender will evaluate interest, principal, and the overall state of the economy to assess risk. Lenders will also look at your competitors and industry.
Lenders evaluate the 5 Cs to determine how risky it will be to lend to your business. The higher the risk, the less likely you are to get approved. The lower the risk, the more likely you are to be approved, receive favorable terms and rates, and qualify for higher borrowing amounts.
Small Business Loan Application Requirements
Applying for a business loan doesn’t have to be complicated if you know what to expect during the application process. Here’s the essential information and documentation you’ll need for your small business loan application.
Business Loan Requirements By Loan Type
While most loans have the same basic requirements, such as bank statements and your federal tax ID, additional documentation and information may be required for certain types of loans.
The Bottom Line On Business Loan Requirements
Applying for a business loan doesn’t have to be complicated or intimidating. While the process can be long, the best way to expedite the process is being prepared in advance. Know how much you need and why you need it. Understand what your business can afford and have the documentation and information needed to show the lender that your business is ready for a small business loan.