Applying for a business line of credit is a big step and there's a lot of information on the internet about the process — some good, some not so good. We're here to cut through the noise and tell you exactly what you need to do to qualify for small business financing.
In this post, you'll learn what to have prepared before approaching a lender and the difference between traditional and alternative (online) lending companies. Let's get started!
What You'll Need: The Basics
Whether you apply for funding from a traditional bank or an alternative lending company (we'll talk about the differences between the two in a later section of this post) will largely determine the benchmarks your business will need to hit to be eligible for a loan.
But both avenues will likely require you to have and present the following four things:
Your Credit Score
Both your personal and business credit scores will be taken into account when attempting to qualify for small business funding. The better your credit, the better chance you have of securing a loan with good terms.
Lenders want to ensure that, in all likelihood, you will be able to pay back your debts. Your credit history — especially your personal credit history — is a good indicator of your financial sense and responsibility.
In general, banks are much more strict regarding credit scores than alternative lending companies. Qualifying for a loan with bad credit is nearly impossible going the traditional route. Historically, online lenders are much more flexible.
Tax Documents
Your lender will probably want access to a few crucial tax documents. These include your personal and business tax returns over the last two years and your employer identification number (EIN).
As we just mentioned, lenders (especially traditional banks) look closely at the owner's financial state, both personal and business wise, before approving a loan. Monitoring tax returns is just another step in this process and helps give the lender confidence that any loan granted will be paid back in full.
Your EIN is basically a social security number for your business. You don't necessarily need one to qualify for small business funding. But if you have an EIN, be sure to share it with your lender.
Business History
When attempting to qualify for small business funding, you'll also be asked about your company's history. Mainly, how long you've continuously been in business. The longer the better as it shows lenders that your success isn't just a flash in the pan.
Most banks look for a minimum of two years in business before granting any loan, big or small. There are exceptions to this rule, but generally speaking, capital will be hard to come by for brand new businesses unless they partner with an online lending company.
Company Revenue
Finally, your lender will want to know about your company's revenue. Are you making money? How much? Traditional wisdom tells us that banks are very hesitant to approve loans for businesses with less than $5,000 in monthly revenue, oAlternative lenders will likely be more flexible when it comes to the amount of revenue your business needs to generate before you qualify for small business funding. But the truth is, if your company isn't making money, you'll be hard-pressed to secure capital.
Know Your "Why" and Have a Plan
Beyond the basic requirements mentioned above, you'll need two more things before you can qualify for small business funding: your "why", and your plan. Let's discuss both in greater detail:
Your Why
Your "why" refers to the reason you're seeking capital. If your business is approved for a loan, what will you do with the money? Maybe you need to hire more staff, stock up on inventory, take advantage of a unique opportunity.
These are all legitimate reasons to seek funding. You need to describe to your lender why your business needs outside financing with as much detail as possible. Your purpose for the loan will help your lender see your vision and be more willing to approve your request.
Your Plan
Knowing why you hope to qualify for small business funding is important, but it's not enough. You also need a plan for how the money will be spent once acquired. Are you hoping to hire new employees? Explain to your lender how many people you intend to bring on board, what their roles will be, their starting wage, etc.
Again, the more specific you can be the better. The entire loan approval process is simply proving to a lending company that you'll be able to pay them back their investment, plus interest, in the allotted time frame.
Presenting lenders with a financial plan proves to them that you're a responsible business owner, and that their money is in good hands. At Line of Credit Depot, we work with our clients to craft foolproof financial plans. We truly want to see small businesses succeed and we willingly lend our expertise to give our clients the best opportunities possible.
