How to Qualify for a Small Business Loan: 6 Key Areas to Consider

Estimated Read Time: 9 minutes

Last Updated: November 18, 2020

Whether you’re trying to open your own operation, expand a current operation, renovate/update certain features of your store, or grow your business in other ways, it’s important to take the right steps to secure a loan. After all, most retail businesses will require a loan at some point. And for many, sufficient loans early on are necessary for survival. Unfortunately, understanding how to qualify for a small business loan is very convoluted.

There are many factors at play and many different types of loans. But we’ll do our best to break down how to get a small business loan and understand what loans are right for certain retailers.

The Different Types of Small Business Loans Available

There are many different loan types and structures. They depend on the type of business you have, your business history, and other specific needs that your business may require.

It’s worth noting, too, that there is one basic distinction between loan types: secured and unsecured. Secured means that you will have to offer some sort of collateral to protect the lender. Unsecured loans will only be given to established businesses with a great credit history.

Simply put, there is no one-size-fits-all scenario, but below are some of the most common types.

1. Small Business Line of Credit

A line of credit means that your business can withdraw funds when needed. Of course, this typically comes with a cap, but it’s a great option for many retailers because of its flexibility. It protects businesses against emergencies and unplanned expenses. This loan usually comes with monthly interest payments and sometimes additional fees for time or value extensions.

2. Term Loan

Unlike lines of credit, term loans are a preset amount and must be used for specific purposes. Like most loans, interest is paid monthly and the loan is expected to be paid off in total within several years. These are ideal for businesses that are trying to grow, or for those that need a large, one-time payment.

3. Government SBA Loans

Banks or credit unions that partner with the government can offer lower interest on some loans since they’re secured by the U.S. Small Business Administration (SBA). The SBA gives qualifying businesses friendly terms of the loan, typically charging less interest and easier repayment terms. The organization is also more likely to offer loans to businesses that may not qualify for loans from traditional banks. SBA loans can be as large as $5 million and are typically used to expand business, make repairs, assist the community, or purchase space/equipment.

4. Extended SBA Loans

After the CARES Act was passed in March of 2020, the SBA has also extended their resources to offer additional loan programs to help businesses retain employees, deal with loss of revenue, and even help relieve debt during the pandemic.

Key programs included in the CARES Act are the Paycheck Protection Program (PPP) to assist with payroll, rent, and utilities, the Economic Injury Disaster Loans (EIDL) to cover working capital and normal operating expenses, the SBA Express Bridge Loans to quickly access funds while waiting for other loan approvals, and the SBA Debt Relief to assist businesses with 6 months of principal, interests, and fees owed to their lenders.

The PPP is not accepting applications as of October 2020. However, they may reopen again in the future. Other programs listed are currently active.

5. Other Government-Backed Loans

Small Business Lending Fund (SBLF) – Started by the U.S. Department of Treasury to increase small business lending and support local economies. Capital is provided to qualified community banks and community development loan funds to lend to small businesses. This program also helps to create more jobs and contribute to overall economic growth.

SBIR and STTR Programs – Standing for Small Business Innovative Research and Small Business Technology Transfer, these programs work to push for more federal research and development among small businesses. These programs are highly competitive but incentivize commercialization and innovation.

Loan Guarantees by the U.S. Department of Agriculture – These are guaranteed loan funds to rural businesses for-profit or non-profit. Rural businesses may use the funds for development, installation, supplies, and creating or saving jobs.

GovLoans – A good resource for finding any other government-backed loans including disaster loans for businesses.

4. Equipment Specific Loans

For many businesses, equipment is the most expensive and essential aspect of the operation. So any issues with the equipment can be particularly scary. But many banks offer equipment loans that only require a small percentage paid down. Loan amounts, rates, and structures vary.

Often the equipment becomes collateral for the loan, so lenders are able to offer lower rates. Check out this resource for finding an equipment financing lender for your small business. 

5. Business Credit Cards

While interest rates might be higher, a business card is another form of financing. But do some research – there are some friendly small business credit cards that offer great benefits/rewards and, depending on your history and credit, have lower interest rates.

When choosing a credit card for your small business, consider what you will be spending highly on such as travel and select the one that will end up saving you a significant amount. Also, take into account how often you will be using the card to determine if going with a high cash back rate will actually benefit you. The main thing to keep in mind is that the rewards you earn should outweigh the fees associated with the card.

6. Working Capital Loan

This loan is solely used to cover daily operational expenses, like rent, payroll, utilities, etc. Businesses that are highly seasonal often require such a loan to cover expenses during the off periods. The loan is then repaid with the influx of revenue during the busy season. There a many options for a working capital loan so take some time to determine your specific business needs.

The Factors the Banks Look At Before Granting a Small Business Loan

Lenders will examine several factors when deciding on giving out a loan. So when looking to qualify for a small business loan, it’s important to first understand each of these to make sure your business is prepared.

1. Your Small Business Plan

A well-thought-out and organized business plan is absolutely essential. Banks want to see that your business will be in a position to repay the loan. A strong business plan is meant to show exactly how you’ll have a successful business. Use the business plan to enumerate all major expenses, including administrative expenses, product purchases, equipment, future growth, etc.

2. Financial History

Banks like to see the past few years of financial history to determine if you would have been able to pay off the terms of the loan over that period of time. Of course, it’s more secure for them if your records indicate that you could have paid for the loan in the past.

3. Business Structure

Banks want to see sound business operation. This means they’ll look at the structure and staff, like your executive roles, accounting team, management team, and perhaps even specific résumés. They’ll also probably take a look at all business investors if applicable.

4. Credit Score

A good credit score is necessary for just about any loan. Business loans typically require a score of 680 and above. If your business credit is below this, spend time on trying to improve it rather than seeking out a lender that will accept the loan. Seeking a loan with poor credit is likely to waste your time or leave you with outrageous interest rates. Focus on improving your credit first.

5. Business Documents

Most banks will ask for an operations plan and marketing strategy. Like a business plan, these should be organized and professional. Some lenders will also want to see personal bank statements and tax returns to make sure that the business owner(s) are making money. You might also be asked to provide a pro forma balance sheet, which reports assets, equity and outstanding debts. Finally, have your lease/title, certifications, licenses, and business registration prepared as well.

6. Business Assets

For secured loans, banks will look at what assets are currently available in case of a default. They’ll typically look at cash on hand and accounts receivable.

7. Company History

Not only are past years’ revenue important, but lenders also prefer to see that a business has been around for some time. New businesses, of course, need loans, too, but an established company might not require as much collateral or as high of a credit score.

Lenders of Small Business Loans

While big banks are still the standard for business loans, many small businesses, especially new companies, will be denied. They are seen as too risky, forcing many SMBs to look for alternatives. Luckily, there are more avenues than ever before for finding loans. The internet has opened the door for many new players and the industry has moved away from long-established traditions.

1. Large Banks

Though there are many new ways of obtaining business loans, big banks are certainly still an option. These lenders are usually more stringent in their acceptance and take a longer time to approve loans.

2. Local Banks

Small, local banks are more likely to lean in favor of a small business. Small businesses often benefit the community as a whole and local banks benefit from a healthy community. Their application process is less rigorous and acceptance standards less rigid.

3. Banks Backed by SBA

As mentioned above, many banks partner with the federal government and administer loans that the government is responsible for should the recipient default. The SBA determines the standards and acceptance/rejection, while the bank acts almost exclusively as the facilitator.

4. Online Lenders of Small Business Loans

Web-based lenders are beneficial for speedy loans. There are many reputable lenders that can give short-term or smaller loans for SMBs. You might also find some services that are tasked with finding businesses that need loans. These companies will typically give you multiple lender options.

5. Peer-to-Peer Online Lenders

In an effort to fight the traditional banking system, peer-to-peer lenders have emerged in many online marketplaces. The peer-to-peer platforms don’t do the actual lending, but instead, connect the borrower and lender. This process eliminates some of the most annoying aspects of the lending process: going to the bank in person, long waiting periods, and confusing applications. This will continue to gain momentum and rise in popularity.

6. Microloans

These loans are typically $35,000 and under, and come with low-interest rates. Most microloans are offered by community leaders to under-represented groups, even without proper credit scores.

7. Merchant Cash Advances

Also referred to as a credit card receipt advance, an MCA is a loan on future credit card sales. The loan will be paid back slowly through small percentages of credit card sales until it is paid in full. It’s generally easy to qualify for such a loan and no collateral or credit history is required. You just need to prove you run an operating business by providing past monthly credit card sales.

Steps to Take Prior to Submitting Your Small Business Loan Application

Securing a business loan is usually vital for opening a new business or expanding an existing one. It can also be time-consuming and mentally draining, so it’s important to go into the process well-prepared.

Start by consolidating and organizing your financial statements and accounting history. As we discussed above, banks will want to see your personal and business financial history, so make sure everything is ready to present. It will also show that you’re an organized and responsible owner. You might have your accountant check these over to ensure that there are no issues. It’s even better if your accountant is a certified public accountant (CPA). If you don’t work with a CPA, consider hiring one for the short term so you can avoid more costly audit fees.

More specifically, here’s a list of some common information that borrowers will need to provide to a potential lender:

  • Tax ID number
  • Tax Returns
  • Recent Bank Statement
  • Executives and Management List (including history with the company and résumés)
  • Personal Bank Statement for Executives/Owner
  • Type of Business Structure
  • Past Years’ Financial Statements
  • Future Years’ Financial Projections
  • Business Plan for Growth
  • State Paperwork and Certificates
  • Applicable Licenses
  • Applicable Insurance Policies
  • Total Loan Request with Specific Purposes
  • Credit Score
  • Collateral

Like an initial business plan, treat your loan application in the same way. Write a plan for exactly how much money you need and exactly what uses to which the money will be put. Alongside this, be sure to explain how these improvements will result in added revenue and growth. In addition, though the bank will determine the conditions of the loan, anticipate the length it will take you to pay off the principal.

Finally, take account of your online presence. You want your website to be in full operation and updated. All social media sites should be consistent in their marketing and active with their community. If your business receives reviews, check all applicable sites and address any issues or complaints. Keeping a clean and active web presence shows potential lenders yet another level of organization.

How to Apply and Qualify for a Small Business Loan

Once you have your finances and documents in order the hard part is done. Now you’ll start shopping for potential lenders.

Most lenders require filling out a preliminary form in order to weed out poor candidates. Submit accurate information in order to avoid wasting time down the road with corrections.

Choose lenders that you think will have the best chance of accepting your loan request. There are lenders that specifically lend to businesses seeking equipment loans, for instance. If that’s the case, target these lenders first.

Anticipate the process time for the loan to be given. Typically, it will take a few months from the initial request until the money is deposited in your business account. Don’t apply for a loan for something that you need the next week. In order to speed up the process, have documents ready and respond to lender requests quickly.

Investigate the Terms of the Loan

Once approved for a small business loan, you still need to make sure that it is the right loan for your business. A misunderstood loan can ruin a business, so take the time to review the fine print.

Of course, start by looking at the interest rate. Many loans will come with varying interest rates. These might be planned variations (for instance, the interest goes up if the loan isn’t paid by a given time) or could vary based on global markets (typically determined by the LIBOR rate).

Additionally, find out how often the interest will be collected. Most lenders require monthly payments, but this can vary.

Find out what the duration of the loan is. When must the principal be paid? Is this a realistic goal based on your future revenue projections?

Are there extra fees, like a loan origination fee, admin fees, underwriting costs, processing charges, etc.? What about other operating requirements that the loan puts on your business? Some banks require businesses to maintain a certain level of cash or put a cap on the debt ratio.

Inquire about default terms. Banks will almost always put conditions that allow them to default the loan. Make sure these are fair and not simply in the bank’s favor.

Check what paperwork or reports are required throughout the duration of the loan. You may need to provide statements proving good business health.

If you anticipate the possibility of paying off the loan early, ask about any early penalty fees. While it seems counterintuitive, some lenders will charge extra for early payments to make up for the lost interest fees.

How Your POS System Can Help You Secure a Small Business Loan

Believe it or not, a great point of sale can help ensure you get the loan that you need. Advanced sales metrics, inventory management, and product reports make it easy to present relevant business information to any lender. They also identify problem areas that you can address prior to your loan application. This will help increase your chances of being accepted and seeing your business grow. Click below to find out more about KORONA and how we can help your business succeed.

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About the Author

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Michael Chalberg

Michael has long focused his writing on the world of retail and small businesses. He''s been a part of the KORONA POS team since 2018 and loves helping entrepreneurs find ways to adapt and succeed. In his spare time, you'll likely find him hiking somewhere in the Southwest.

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