As a savvy business owner, you’re already aware of this: a business loan can help you grow your business in multiple and unexpected ways.
There are countless stories of businesses that started small and, thanks to external financing, they were able to grow and grow and grow. Nowadays, those businesses that took a chance with a business loan are now hugely successful and profitable. And you can do the same.
But before you approach your lender bursting with enthusiasm, you must get familiar with all the requirements you need to meet to get a business loan.
Each bank and financial institution has its own list of business loan requirements, but there are several common factors that all of them take into account.
In this article, you’ll learn what the eight most important ones are. Keep in mind. These factors play a significant role in determining the fate of your loan application, so keep reading to the very end!
8 Requirements Needed to Get a Loan Approved
These factors will determine if you get approved for a business loan, so make sure you fully understand them before applying!
1. The number of years that you have been in business
This is one of the most critical business loan requirements. If you are a new company or have set up operations recently, the likelihood of getting a loan is low.
Most lenders will insist that your company should have been in existence for at least two years. This is a typical business loan requirement. Why? Because the failure rate for new ventures is high, and lenders don’t want to take any risks that would lead them to lose any money. If a bank advances money to a new business, and that company closes down, how will the money be recovered?
Data provided by the Small Business Administration (SBA), a United States government agency that supports entrepreneurs, reveals that about two-thirds of new businesses close down within two years of being established. And only half of those survive after five years.
With data from the SBA
Fortunately, not every lender insists that a company should be two years old to be considered for a loan. You are eligible to apply for a Camino Financial small business loan if your venture has been operating for a minimum of nine months.
2. The type of industry that you operate in
A lender may view specific sectors as unacceptable. They may be unwilling to advance money to companies that work in these areas.
This list could include gambling and pawn shops. A bank may not want to provide finance to such businesses as it could harm their reputation.
Similarly, many lenders are reluctant to advance funds to nonprofits. That’s because these organizations are often dependent upon donations for running their day-to-day operations. If this source of income dries up, how will they repay?
Each lender has its blacklist. For example, the business loan requirements laid down by some financial institutions prohibit lending to restaurants. Why is that? The restaurant business has a high failure rate.
Others, like Camino Financial, are not only open to the idea but have restaurant owners among their main customers. Why? Because they understand like no other lender the unique features, challenges, and needs of this industry. We go beyond lending capital and guide business owners in their entrepreneurial journey to guarantee their success.
What can you do if your loan application is turned down because you operate in an unacceptable industry?
Approach another financial institution. They may be perfectly willing to give you a loan.
3. The loan amount that you are looking for
The amount of money that you plan to borrow plays a crucial role in determining whether your application will be approved. There are two reasons for the loan amount being among the most critical business loan requirements:
Firstly, every lender has an upper lending limit as well as a floor level below which it will not provide a loan. Setting a maximum loan amount would ensure that there is a cap on the lender’s risk. Similarly, each lender’s internal rules would stipulate a floor below which it would not lend.
The reason is that every loan involves processing and underwriting costs as well as servicing expenses. These remain the same regardless of the size of the amount that is advanced. Consequently, low-value loans can be uneconomical for the lender.
- Cash flow
There is a second reason that the loan amount is considered to be a key factor. The bank or financial institution that is advancing money to you would like to be sure that your business could generate the cash flow that is required to repay the borrowed amount. Ask for too much, and you can be sure that your application will be turned down.
How can you determine your company’s repayment capability?
A simple way to do this is to work out the monthly installment that you can comfortably afford to pay. As an added precaution, limit your borrowing to a sum that requires a monthly payment that is 80% of this amount. This will give you a buffer in case of an emergency.
Use a business calculator to arrive at your monthly installment. If you key in the loan amount, the payment term, and the monthly interest rate, our Business Loan Calculator will tell you your installment amount. Doing these calculations will provide you with the loan amount that you can comfortably afford to repay.
4. The use you’ll give the money
The lender would like to know how you would be using the money that you plan to borrow. Of course, the funds must be deployed in your business. You will not be allowed to take a business loan and then use the funds for your personal expenditure.
You should be ready to provide an explanation that covers the following points:
- How will you deploy the funds that you borrow?
- What is the extra income that the loan will help you generate?
- Is this amount sufficient to repay the loan?
Remember that the term of the loan should match the period over which you will generate additional income.
For example, you may borrow to purchase new machinery, which has a life or five years. You should ensure that the loan repayment term is also five years or a little less than that. You don’t want to be in a position where you are repaying a loan that you took for an asset that isn’t generating revenue any longer.
5. Your personal credit score
This is among the key business loan requirements. You may wonder why a lender would consider your personal credit score if you are applying for a business loan. However, this score provides the lender with information about how you meet your financial commitments.
Most banks and financial institutions will take this score into account before deciding on your loan application.
What is the score you need to guarantee that you receive approval?
You can learn more about the subject in this post, where you can check what interest rates and terms you may receive according to your personal credit score. If you are trying for a low-cost SBA loan or a bank loan, you stand a better chance of receiving a positive reply if your score is at least 650 or more.
But remember that your credit score is only among many business loan requirements.
Are you worried that you won’t get approval because of your poor score?
Fortunately, there are ways around this problem. It’s possible to boost your credit score by 60 points in 60 days.
6. Your business credit score
Most lenders will use your personal credit score to decide on your loan application. But SBA lenders and banks will usually ask for a business credit score as well.
This score is calculated by analyzing your payment data and how you utilize your credit facilities. If your company delays payments or uses all its credit facilities as soon as they are available, it can result in a lower score. However, don’t let a low score deter you. There are ways to build business credit quickly.
7. Annual sales of your company
If your firm has a consistent stream of revenues that is increasing steadily, it will be considered to be a positive sign by lenders.
Rising sales are an indication that your business is gaining popularity among customers. The lender will be assured that you will have the cash to repay the money that you borrow.
Some lenders consider your sales to be among the more critical business loan requirements. They even calculate the loan amount that you are eligible for by using your annual sales figure. For instance, a lender may be willing to advance between 10% and 12% of your revenues as a loan.
Of course, your revenue will not be the only consideration.
How you utilize the money that you receive by selling your product or service will also be considered. If your profit margins are slim and most of your funds go towards buying raw material and paying other expenses, you may not be able to get a loan approval even if your sales volumes are rising.
One of the other critical business loan requirements is that your sales must be more than a particular threshold. Some lenders stipulate that your company must have annual revenues of at least $100,000.
However, all lenders don’t set such a high minimum figure. You can apply for a loan from Camino Financial if your firm generates sales of $30,000 annually or $2,500 a month.
8. The collateral you bring to the table
Some lenders insist that you agree to put up business loan collateral before they consider your loan application.
Why do they do that?
They aren’t sure if you are capable of repaying the sum that you borrow. The collateral that you provide assures them that they will not lose money if you default. If you fail to repay, they will sell the building or the machinery that you have provided as security.
Many small business owners do not have any collateral to put up. The good news is that some lenders don’t insist on collateral. They extend what is called unsecured business loans.
The essential business loan requirements stipulated by Camino Financial don’t include the necessity of providing collateral. As long as you meet the other criteria that are laid down, you could still be eligible for a loan.
Access here a complete checklist of documents required for a business loan
The bottom line
If your business needs a cash infusion, consider taking a loan from Camino Financial.
We are more flexible than traditional lenders like banks since we don’t base our decision on all the factors mentioned above. Mainly, we take into consideration the personal credit of the business owner and global cash flows.
Also, funds from our loans can be used to pay off personal loans or credit cards that had been utilized for business purposes. You can even use the loan to purchase a second business.
To apply for a loan with Camino, you should generate sales of $30,000 annually or $2,500 a month, a much lower amount than the one required by other lenders, and your company must have been operating fur just 9 months. That’s much less than the 2 years that most lenders require.
And remember: Camino Financial is open to extending finance to borrowers with no credit history. Additionally, you don’t have to provide us with collateral.
All you have to do to start is submitting your loan application.
It will take only a few minutes, and you will receive an instant response informing you if you have been prequalified. Subsequently, one of our representatives will get in touch with you and guide you through the borrowing process.