Many people worry that taking out a loan is a negative thing, and that it could mean their business is not financially succeeding independently.
What Are Small Business Loan Requirements?
In reality, there are a number of reasons that people seek out business loans, and very few are for negative circumstances. Having access to more funds allows you to improve, upgrade and expand your company, in order for you to grow and develop. Often, these growth periods require more capital than you might have lying around which is why a loan can be so useful.
But what are some of the things you are going to need in order to apply for a loan?
It’s important to note that while there are basics you will require for all loan applications, the specific process may differ depending on the lender, and the state you are in. While it’s good to generally prepare yourself, also make sure you are researching your specific lender and their requirements. Ensuring that you have the correct proof and paperwork according to your small business loan requirements can help you to save time, and increases your chances of being successful.
Types of small business loans
The market is full of different loan opportunities, meaning that you can find a financial option that works for your business, with no unwanted extras. Each loan option will have its own unique draws and as a result, slightly different requirements for application. Once you have decided what kind of loan aligns with your business needs, you should then check these specific requirements. It’s also important to note that there isn’t really any standardization across loan types either. Different lenders may offer the same loan type, and still have different requirements.
Term loans are a great option for many businesses, as they offer a range of uses. If the loan is approved, funds are given to the company in a lump sum, and the business can use it as needed. There is a fixed payment schedule and a fixed payment term, which is where the name comes from. These terms usually start at one year and can go up to 10 years, although some can last as long as 30 years, depending on the size of the loan and the agreement.
The loan repayments are made with interest, and this can be either fixed or floating. Fixed interest rates are set for the duration of the loan, and you are always aware of how much you will eventually pay in interest. Floating interest rates may change depending on the state of the market. As a result, you may pass less interest in the future, but equally, it may also increase if market rates become unfavorable. There are certainly pros and cons to both types, so always talk to your lender to understand your options.
Some term loans may also require collateral just in case you are unable to pay your loan back. This collateral can come in many forms, but is generally the assets that belong to your business (the property or your equipment) or it may even be cash.
The Small Business Administration (SBA) can also provide loans, aptly named after the lender. These are the most similar to traditional bank loans, and can only be given out by accredited lenders, usually certain banks. Booster Financial works with the Small Business Administration to fund these loans, providing businesses with a wide range of options from a single provider.
SBA loans are not a lump sum of money to the business directly. Instead, they are a partnership with the SBA and accredited lenders (usually banks, in this case, Booster Financial) that guarantee your loan application under SBA requirements.
There are four different types of SBA loans:
This is the most commonly offered type of loan from the SBA, because it is the most flexible and therefore suits most businesses. It can be used to help expand your business by purchasing new land or equipment, replacing old or worn equipment, and even refinancing your existing debt. Different needs have different maximum capacities that can be financed, and different payment terms. For example: if you are using the loan to purchase fixed assets, you may have a term of up to 25 years, but if you are using it to help fund the daily running of the business (working capital) the maximum term is only up to 10 years.
Microloans are small loans of $500 up to $50,000 that can be given to businesses, and these are generally considered to be the easiest SBA loan to receive. The loan term for a microloan is up to 6 years maximum. The lender (e.g. the bank, acting as an intermediary) can also provide business training and assistance to borrowers, so they don’t just receive the money with no support.
According to the SBA website, these microloans are designed to support small businesses and not for profit child care organizations. The loans can be used to help start up the business (where the supporting financial advice may be useful), or they can help existing companies to expand and grow.
Real Estate and Equipment Loan Program
Also known as a CDC/504 loan, this is designed for purchasing new land, buildings or large machinery, or upgrading/improving existing land or facilities. These loans can be up to $5 million and there are options for 10 and 20-year loan maturity.
These are financed in a particular way: The company seeking the loan pays 10%, the SBA directly pays 40%, and the SBA-approved lender pays for the remaining 50% of the total loan amount.
Unwanted catastrophes occur, and the SBA offers specific disaster loans to help businesses recover as soon as possible. If a business is located in a “declared disaster area” and has been impacted by something like a natural wildfire, hurricane, or flood, the SBA can provide a loan of up to $2 million. The SBA will also support businesses impacted by civil unrest.
Under the disaster loan umbrella, there are four different types of disaster loans:
Physical Damage Loans that offer support to repair and replace any physical assets belonging to the company
Mitigation Assistance to support businesses in the aftermath of a disaster by helping to cover their operating expenses
Economic Injury Disaster Loan which supports companies who have experienced damage to their personal home or property (not necessarily the business property)
Military Reservist Loan can provide financial assistance for operating costs when employees must take active duty leave as a result of a disaster.
Small Business Lines of Credit
A small business line of credit is essentially a revolving fund. It operates in a similar way to a credit card, where the business receives approval for a maximum amount it can borrow. They pay back all of the money that they spend, and they have access to all of the remaining funds. Once they repay the line of credit, they have access to the full amount again. Another benefit to this type of loan is that your business only needs to pay interest on the amount of money that you have spent and is outstanding, not the full credit limit.
This is an ideal small business loan for companies that may have ongoing needs for funds, but do not need a lump sum on a one-off occasion. Business lines of credit can last for up to 5 years, and you can use it as much or as little as you need, as long as the balance is paid. It is slightly more favorable compared to a traditional business credit card because it can have a higher maximum limit, and lower interest rates. The only downside is that there are some limitations to what you can spend a line of credit on (although this is still relatively broad compared to some other business loan types).
Purchasing new equipment and repairing/replacing old equipment are necessary costs for any business, at some point in time. If you don’t have the funds exactly when you need them, a specific equipment loan may be the solution. Whether you need a new truck, digger, or even office furniture, this loan is designed to facilitate that.
The size of the loan is going to depend on what equipment you need to purchase, and this will also help to determine the loan term. The majority of these loans operate using the equipment you will purchase as collateral, so you don’t necessarily need to identify other existing assets to be used for this purpose.
Business Credit Cards
Very similar to lines of credit, business credit cards are great for companies that predict they will have somewhat frequent financial needs. It is easier to have the money on hand in the form of a credit card, than to apply for lump sums each time you need it.
Credit cards are designed to pay for smaller business expenses when you have cash flow issues. These can be paid for easily, and then the balance is paid off when the cash funds arrive in your account. It is a revolving line of credit, so you always have the balance of the card to use over and over again, as needed.
These are great for all miscellaneous expenses. You do not need to identify to your lender exactly what you are spending the funds on, before you use it. This offers a lot of flexibility that many businesses appreciate. The downside is that these can have higher interest rates than other loan types (e.g. the line of credit), however, you only need to pay interest on the amount that you have borrowed.
Merchant Cash Advance
A merchant cash advance (MCA) is not technically a loan, it is a guarantee of your future sales. If your business receives a significant amount of credit card or debit card sales, a lender may purchase these future sales. In the future, as the sales come in, a percentage of these will be directed to the lender straight away. This percentage will differ depending on the agreement, but is anywhere between 5 and 20%. If you have good sales, the amount you pay back will increase, but if you have poor sales the total amount you pay back will be lower for that period.
With MCAs, this repayment process means that there is no set repayment term – a percentage of your sales gets forwarded until you repay the loan in its entirety. The system works for some businesses who are confident in their sales, however, if your business is a lot more inconsistent, you may find yourself paying more in interest over a longer period of time.
Invoice factoring is an option for businesses that struggle with cash flow issues. If you have invoices incoming, it can still be a significant period of time before these are paid out, and it’s likely that you need the money sooner rather than later. With invoice factoring, a lender will take on some or all of your accounts payable, and give you a portion of the money upfront. Then when the invoices are received, they go directly to the lender, which is how they recoup their money.
This is only ideal for businesses who are confident in their clients, as a failure for the invoices to be paid will result in more debt for you. Some companies also do not like this method as the clients pay the third party lender directly, not you, so they are aware of the lender’s involvement as well.
Invoice financing is similar to invoice factoring, but slightly different. It is where a lender will offer you a loan based on your outstanding invoices. This loan will be a percentage of your invoices, up to 90%. When you receive the invoice you then pay back the lender the amount you borrowed, plus any interest. Essentially the invoices act as collateral for the loan.
Some businesses prefer invoice financing as it gives them greater control over their finances. The customer still pays their invoice directly to you, not the lender (you then pass the funds on). Businesses can also personally follow up on outstanding debts if necessary, allowing you to do this effectively and still maintain the working relationship.
Real Estate Loans
Purchasing new properties or extending existing ones is a significant process, and one that often requires financial support. Commercial real estate loans are similar to traditional business loans in terms of requirements, but they are specifically for purchasing commercial property.
The amount you can borrow will depend on the lender and your business needs, but can often be up to $5 million. The terms of the loan can also differ, but will generally be years long. In situations where you must default on the repayments, the lender can use the property you purchased as collateral.
Franchise Startup Loans
People who wish to open a franchise have a whole extra set of financial options available to them. Because the franchise is part of an already successful brand, lenders can use this brand to have more faith in the future opportunities for this particular location. As a result, the new franchise is likely to get more support to get it up and running compared to a unique, independent business.
The loan can be used for a number of purposes, such as buying equipment, paying the franchise fees, and even operating costs, to begin with. These are generally seen as short term business loans, so have relatively short repayment periods.
Requirements for Business Loans
Here are some of the basic requirements of a small business loan that you will need to provide, no matter what loan type you are seeking. Typically you will be asked to collate all of this information in your application, for your lender to view and use to determine the outcome of your application. Many good lenders will offer you support when getting this documentation together, so you can be sure you are providing exactly what they need to check.
Most lenders will want to see the credit scores of the business owner (or business owners, if there are multiple). The higher the credit score, the better your chance of being approved for the loan. The credit score indicates your ability to manage your debts, and the likelihood that you will be able to pay off this loan. Generally, the greater the credit score, the more money you will be able to borrow in a small business loan. For most lenders, a credit score that is anywhere from around 650 and above, will be considered a good credit score.
If you have a bad credit score, this isn’t necessarily the end of your application! Different types of lenders have different application requirements. For example, traditional lenders such as banks or the Small Business Administration do require relatively good credit scores. However, newer, more flexible lenders such as online loan providers such as Booster Financial may have a slightly lower threshold, on average. If your credit is not good enough to receive approval from a bank, consider all other options before you stop trying.
Business Plan/Intended Use for Funds
Lenders want to be able to see exactly what you plan to use the loan on, and why it’s a good use of funds. Having a business plan that you can present to them allows them to understand your intentions, but also how you plan to use the funds in order to grow and develop your company. This plan should include information on your business, your products or services, key members of the management team, and financial details for the past six months to a year (depending on what the lender specifies). In general, having this paperwork helps you to look more professional, and sets a good tone for your application.
Most importantly, the business plan should identify how the loan will help your business financially (ideally increasing profits), which will enable you to pay the loan back according to the contract. The lender is aware that you cannot pay out of pocket for your plans, so they need to be sure that you can pay the extra funds back, if they provide them.
Loan providers want to understand the financial context of your business, in order to determine whether a loan would help you as intended, or just cause further financial strain later on. Reputable lenders will not give loans to businesses that cannot afford them, as their intention is not to create impossible debt. Most lenders will ask to see bank statements going back 3 months, 6 months, or even a full year – it depends on what their criteria calls for. This shows the lender that you have decent cash flow on a consistent basis by way of consistent deposits, and that you have the funds required to repay the loan as intended. The amount of money you need to have in the bank in order to be approved for a loan will vary, depending on the size of your business and the size of the loan you are applying for.
If you have already borrowed funds from the bank for other purposes, the lender will also look at your account rating, to determine how much more money you can borrow from that lender. It is not necessarily a bad thing if you are still paying back previous loans, but it may limit how much you are eligible for.
Balance Sheets help lenders to understand how much your business is worth. This should include information about your assets and net worth, debt, and how much money you put into your business. From this information, lenders can then determine the number of calculations, including your debt to equity ratio (how much equity and the debt you are using to finance your business). This is then used to understand how much debt you can afford, given your amount of assets.
There is a growing number of businesses that don’t have many assets but are still profitable – e.g. totally remote computer services. On paper, this can potentially hurt your opportunities for a loan with more traditional lenders. However, it’s important to note again the flexibility of online lenders, who may utilize other methods to determine how successful your business is, not just your assets.
Cash flow relates to the amount of money that is coming into your business on a regular basis. This also helps to show how much profit your business has, after all, expenses have been paid. Ultimately, this will be the money that pays back the loan, so the lender needs to be confident you have the funds coming in. For most businesses, cash flow will peak and ebb – it is very rarely consistent. As long as you can prove that on average you meet the thresholds for the small business loan requirements, you are fine.
Your cash flow helps lenders to determine your debt service coverage ratio. This is the cash flow income that you have, divided by the debt of the loan. Ideally, you want to have a debt service coverage ratio of anywhere between 1.25 and 1.50. This indicates that you are financially able to pay the loan back.
In situations where your debt service coverage ratio is too low, the lender may still agree to the loan, but only with an interest reserve. This is an account that holds funds in the event that you are unable to make the loan payments, the funds from here can be used.
If your loan is a collateral loan, it means that you are entering an agreement with the lender that in the event that you cannot pay back the loan, they can seize collateral assets of an equal value. It is a good idea to understand the value of your assets before you apply, as this can take some time to organize.
Most collateral loans will require assets from the company. This means that your private assets cannot be touched. However, some lenders may ask that company owners offer their own personal assets, if the company does not have enough. Always understand exactly what you are signing, and whether or not you are prepared to go ahead.
The other type of loan is an unsecured loan – these do not require any collateral to be signed away. With these types of loans, the lender has more to lose if you stop paying the loan back, as they cannot seize the amount any other way. Because of this, they are likely to offer smaller loans with higher rates, compared to collateral alternatives. Many people still prefer this, but always do your own research to understand what will work best for your business.
If you are looking for a small business loan and need support to understand the requirements, let Booster Financial help you. We offer a range of different loan options, designed to suit all needs and companies. Our dedicated support team is always ready to provide information and insights, ensuring that you make an informed decision that works for you and your company’s goals.
We strive to help everyone achieve the financial success they are aiming for. Even if you have bad credit, talk to us today. There may still be options that we can help you to explore in order to continue growing and expanding your business. We offer support to small businesses in and around the New York State area.
We strive to make our loan requirements simple and efficient for our clients. All of our loan requirements are available to check on our website, and our application process only takes a few minutes. We strive to process applications as quickly as possible, as we understand that often financial needs can be time sensitive.
What are the requirements for a small business loan?
Generally, you will be expected to provide the following:
Proof of a decent credit score (650 or above)
A business plan that identifies your use for the loan and how it will generate income
Bank statements that identify your business have enough income to pay back the loan
A balance sheet that identifies the business’ assets and debts
Proof of sufficient cash flow
Collateral (if you are taking a collateral loan)
Will small business loan requirements differ depending on the different types of loans we use?
Yes, different loan types generally have their own requirements for application. While a lot of these will be standard, there may be extra information you need to provide. For example, if you are applying for a disaster relief loan, you must provide proof of the impact of the disaster.
Where do I find information about the small business loan requirements from Booster Financial?
Information about loan requirements for different loan types is available on our website, or you can contact a helpful member of our team directly for support.
Does my business have to provide collateral for all loans as a requirement?
No, not all small business loans require collateral as part of the agreement. Some loans are known as “unsecured,” which means you are not required to identify any collateral. Many people appreciate these types of loans, but it should be identified that they can have higher interest rates and fees, as protection for the lender.
Will requirements for a small business loan differ between lenders?
Yes. Although most lenders will have similar requirements, required minimums or credit scores may differ slightly. This is important to note because if you are declined by one lender, you may still have the opportunity to access a loan with another lender.
In general, traditional lenders such as banks may have stricter requirements compared to more flexible lenders such as those that operate online.
Understand Your Options
Find out more about the different finance opportunities available in your area and get funded today!