Top 5 Small Business Loan Requirements
Congratulations, you’ve decided to launch your own venture, and now you’re curious about the small business loan requirements. While there are many choices and options when it comes to funding your dream, there are important requirements you need to have in place before any lender will consider your small business loan request. Here are the Top 5 small business loan requirements.
Small Business Loan Requirement #1: Make Sure You Have Impeccable Credit
One of the most important, if not the most important small business loan requirement is ensuring your credit is excellent. Maybe not flawless – but it needs to be in really good shape. The key is preparation! Do your research ahead of time. Do you know your FICO score? Your FICO score is a summary of your credit risk which lenders use to assess things such as whether or not to extend credit and if so, at what interest rate. You can identify your credit risk and find out your FICO score by employing free online tools such as the one at www.fico.com.
When meeting with potential lenders, come prepared to show not only your business credit history but your personal credit history as well. Got credit card debt? A few late car payments? Student loans in default? These kinds of things will delay if not halt your small business loan process. Excellent credit is a fundamental aspect of small business loan requirements. Work aggressively to clean up your credit, fix any credit reporting errors (*Note: credit reporting errors do occur. Take time to read your credit reports thoroughly to ensure accuracy. Report any discrepancies immediately).
These factors are key for any lender when they are considering your ability to repay small business loans. Having stellar credit is an essential piece of the lending puzzle. It’s a snapshot of your financial performance – both as a small business owner and as an individual. The bottom line? Know your credit scores, fix any errors, work to improve your credit scores if possible (even if it means delaying your small business loan application process), and come prepared.
Small Business Loan Requirement #2: Have a Solid Business Plan
Any lender worth their salt will tell you that a well thought out and thorough business plan is a requirement of small business loans. A business plan is basically a profile of your business. It provides a detailed explanation of what your business is, how it fills a niche, the products or services you’re providing, etc. Essentially, it gives the lender a clear picture of what your small business is all about.
There are online resources to help you write a business plan if it’s not something you’ve done before, but overall, a business plan serves as a “blueprint” for your small business.
A good business plan includes:
- A detailed description of the product or service you’re offering
- An explanation of how your product is unique in the market
- A description of how your business is fulfilling a need
- A list of tactics and objectives for the goals you’ve identified for your business (i.e. you know where you want to go, but how will you get there?)
- And perhaps most important, your business plan should show projected revenue
Each of these components provides lenders with a good snapshot of the potential success of your business. Your business plan should be also be a fact-based projection over the next three to five years or so of the expectations for revenue and growth you have for your small business.
Lenders use the information you provide in your business plan to project the success or failure of your business and to determine the worth of your business as it relates to securing a small business loan.
Don’t over think it! Your business plan doesn’t have to be a 12-page dissertation on the history of goods and services. It needs to be clearly stated, in plain English, with tactics and objectives clearly outlined.
There are plenty of free business plan templates and tutorials available online, including one at sba.gov. A solid business plan will serve you well as a tool for day to day reference in your business, and it is a main ingredient in the requirements for small business loans.
Small Business Loan Requirement #3: A Strong and Compelling Personal Resume
A personal resume might seem a bit odd to list as a requirement for small business loans, but it’s an important tool. Potential lenders want to see your work history. They want to know what level of expertise you bring to the table. You aren’t interviewing for a job here, but you are demonstrating that your combined talents and professional expertise have set the foundation for success as a small business owner. Appearances are everything. The more professional you appear on a resume, the more likely a lender will be to consider your small business loan application.
As with business plans, there are countless free resources online to help you begin, update or polish your professional resume. As one of the significant small business loan requirements, spending a few dollars to ensure you’re painting the best picture possible of your professional accomplishments is money well spent.
#3a: What’s Not On Your Resume…And Why It’s Important
We said “Top FIVE Requirements for Small Business Loans”, but there are some additional things we want you to be aware of regarding resumes and small business loan requirements.
A good resume speaks to your professional and personal accomplishments, the goals you’ve met and exceeded, the results you’ve achieved, the accolades or awards you’ve earned. It does not, however, indicate whether you’re male or female. Or if you’re a veteran. A person with disabilities. Or someone with social or economic disadvantages. All of these factors are important to convey because not only are there lending laws preventing discrimination of any kind, but there are also specific loans geared toward groups of people who in the past may have been discriminated against unlawfully. Specifically – women, minorities, veterans, businesses in rural areas and those business owners with certain disabilities.
Don’t consider these factors as weaknesses! Rather, you would do well to leverage the opportunities that now exist through fair lending laws to ensure you receive the greatest possible consideration for your small business loans.
In addition to a personal resume, this would be a good time to reach out to professional colleagues, friends and family who may be able to vouch for you. References are definitely one of the most important small business loan requirements – and they’re something that could make or break you. Review your list of vendors and clients. Is there anyone or any business with whom you’ve had trouble? Hopefully, you’ll have a good list of business and personal references that can be provided to lenders as they review your small business loan application.
Small Business Loan Requirement #4: Bulletproof P&L Statements
If you’re not familiar with a basic profit and loss statement or a balance sheet, you may want to do some additional research online. You’ll need to make sure you have both your personal and business financial statements in order and bulletproof – meaning the level of integrity in your reporting is accurate and ethical. It is one of the best indicators as to how your business is doing in the real world and it’s one of the main things lenders consider when reviewing small business loan requirements.
Note: This is different from your credit rating. In simple terms, your P&L sheets represent the revenue you have coming in and the expenses you have going out. The difference between the two – along with other factors such as fixed costs - helps you determine your profit margin.
If your profit margin is relatively small, you may want to consider applying for a microloan. Microloans, such as those offered by the Small Business Administration, provide up to $50,000 to small business owners to help with business-related costs such as start up, inventory replenishment, and business expansion, to name just a few.
While these microloans are beneficial to small business owners, the time it takes to apply for the loan, process the application and wait for a decision can be cumbersome. Most small business owners need the cash quickly to expand their business, obtain working capital, purchase additional inventory or supplies, etc. A quicker alternative to traditional microloans is Kabbage’s short term, merchant cash advance loan called “Kabbage Kash.” It’s a seamless way to get funds quickly and easily and while similar to the SBA’s microloans – Kabbage offers a much faster turnaround time.
Note: Having some form of collateral – something against which you can base the loan application – is important (although not always required) for most lenders. Keep in mind that although your business idea and plan may sound great, without some kind of collateral to put up front, some lenders may be reluctant to offer loans.
Small Business Loan Requirement #5: Develop a Comprehensive, Strategic Marketing Plan
One of the most overlooked requirements for small business loans is the development of a strategic marketing plan with vision toward the next two to three years, at least. Having the necessary capital to start up, re-launch, or expand your business is crucial, but lenders also need to see your plan for how you will successfully promote your business.
Years ago, a simple marketing strategy of direct mail, print ads, radio spots and possible television commercials would do the trick. Unfortunately, many of these tactics require a significant amount of advertising money upfront – funds that could be directly applied in your business to build inventory, expand product offerings, etc. Also, with newspaper and magazine readership at all time lows, who is really going to see your well-placed, highly priced, quarter page ad? The Internet has changed everything – and one thing it’s really changed is the way businesses advertise.
Social media has become one of the most effective and efficient means of advertising whether it’s business to business or business to consumer. By leveraging the powerful reach of Facebook, Twitter, YouTube, email marketing, LinkedIn and/or blogging, you’ll be able to reduce your overall marketing costs and increase your reach to your target audience. Make no mistake, you’ll still need funds for marketing, but the amount is significantly less than in years past. And in the long run, a solid marketing plan based on “new” media tactics will leave you more funds to directly invest in your small business.
According to the latest US Bureau of Labor and Statistics research, there are approximately 28 million small businesses in the United States. Some succeed and some fail. It really all depends on your dedication, commitment, preparedness and your ability to meet the small business loan requirements most lenders call for.
Traditional lenders of small business loans include the brick and mortar bank buildings you can see on virtually every street corner in America. In fact, when you think about small business loans, personal banking, mortgages and the like, banks are usually the first things that come to mind. But don’t disregard the alternative lenders, such as Kabbage, as well. There are many lenders to choose from, but they are all there to help small businesses – just like yours – to grow and be successful.
All lenders – whether traditional brick and mortar or alternative lenders such as Kabbage – will be looking at three things when reviewing their requirements for small business loans:
- Your ability to repay loans
- Whether you are strong enough to withstand tough economic times, as evidenced over the last decade or so.
- And, they want to see your passion and commitment to making your small business succeed.
The final decision lies with you. It’s your business. Do your research! Know your facts. Put your best foot forward and make sure you’ve met these small business loan requirements.
Remember these 5 Requirements for Small Business Loans
- Be sure you have impeccable credit
- Have a solid business plan
- Create a strong and compelling resume (and leverage what’s not on your resume to maximize your loan potential)
- Bulletproof P&L statements
- Develop a comprehensive, strategic marketing plan
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