Taking out a small business loan is the bread-and-butter of starting, running, and growing your small business. That extra capital can supplement your startup funds, loosen your cash flow, help make ends meet, and give you the boost you need to expand your operations.
But why is it so hard to understand what you need to apply for one?
Every loan type has its own general standards for the wide range of metrics lenders will measure your business's credit eligibility by. Profitability? Time in business? FICO credit score? What you need for each category changes with the loan product you're looking to grab.
So we've simplified things for you. We're breaking down 8 different criteria lenders typically look at, and showing you what the minimum requirement for each is with every different type of loan you'll consider for your small business. Let's dive in.
1. Years in Business
Only 50% of small businesses last their first 5 years, according to this Small Business Administration study. And generally speaking, the longer you've been in business, the more likely it is you'll stay in business.
Lenders know this, so they prefer borrowers with proven records. Multiple years in business shows you can withstand seasonal changes, economic downturns, and unexpected obstacles.
The Small Business Administration's 7(a) loan program--a slow process but one with a low interest rate--requires at least 2 years in business. On the other hand, the quick but expensive merchant cash advance option needs only 5 months.
Those are the extremes: every other product is either 6 months--like a short-term loan and invoice financing--or a year--like a medium-term loan, equipment financing, or a line of credit. It's a big jump from merchant cash advances to SBA loans, but the path between is full of other options you should explore.
(What about a startup loan? Well, as you might guess, startup loans have a minimum of... 0 months in business!)
2. Revenue
Higher revenue is one way to measure your business's success--and the likelihood you'll pay back your loan.
The loan products with the highest revenue minimums tend to be the medium-term loan ($200,000) and the line of credit ($150,000), while all others clock in substantially lower, between $50,000 (invoice financing and the SBA loan program) and $75,000 (equipment financing and merchant cash advances). Again, startup loans require a minimum of $0!
You might be thinking, Wow, the Small Business Administration's 7(a) program has a pretty low revenue minimum... And you'd be right. That's because the government set up the SBA to help support younger, smaller businesses. Do keep in mind, though, that if your revenue is at the absolute minimum of this (or any other) loan product, you should aim to have a stellar credit score and no other red flags in your application.
3. FICO Score
We're talking personal credit score, not business credit score, because lenders see every small business as an extension of its owner. As usual, higher is better, but you don't need an impossible credit score to qualify.
Unlike with the past few criteria, with your credit score a startup loan actually requires the most: a minimum of 700. That's the give-and-take of requiring no revenue or time in business, though. You need to have proven yourself as a responsible borrower somehow, and your personal credit score is the way to do it.
Going down, the next highest minimum is the SBA 7(a) loan at 640, and then medium-term loans, equipment financing, and lines of credit at 600. Short-term loans and invoice financing require at least a credit score of 500, and finally, merchant cash advances only need to see a 400.
4. Profitability
Showing that your business has produced profit is always a good thing. At the very least, it'll prove that you've settled on a successful business model and better the terms of whatever loan you choose. But will it impact your ability to get a loan?
For the most part, no. Profitability is a factor only for getting a line of credit; all other loan products generally don't need to see it. Keep in mind that a successful business doesn't mean a profitable one--yet.
5. Bankruptcy
While declaring bankruptcy may feel like the end of the world, never fear. It actually won't affect whether you can get a loan for your small business--although it might affect when you can get a loan.
Both the SBA and startup loans want to see that you've been out of bankruptcy for 3 years, while medium-term loans, equipment financing, and lines of credit like to see at least 2. Short-term loans and merchant cash advances are content with only 1 year out, and invoice financing doesn't require any time at all (since you're using your invoices as collateral already).
6. Credit Card Volume
Some types of loan products require credit card volume, as that's how they'll get repaid. For the most part, your credit card volume isn't an issue--except with short-term loans and merchant cash advances.
For short-term loans, if this is a factor, you'll need to show a volume of at least $3,000. However, credit card volume is always a factor for merchant cash advances, as that's how you repay that type of loan. They typically require a minimum of $4,500 in credit card volume.
7. Accounts Receivable
Like your credit card volume, your accounts receivable matter only to the lenders of a few loan products. In this case, your accounts receivable are a factor in your borrowing eligibility for lines of credit--because your lender will consider what'll you need to draw on while you wait for your pending payments--and for invoice financing--because those invoices will serve as collateral for your loan.
8. Existing Debt
Your existing debt is the least definitive factor of your eligibility. Some lenders care all the time, others sometimes, and still others not at all--and as usual, this also depends on your loan product.
The question here is: If you have existing debt with one lender, will another one take "second position?" It's a risky move, because they won't be first in line to collect if you go bankrupt.
Lenders of most loan products can only offer "sometimes" to answer that question, with three exceptions. Invoice financing is a product that lends itself well to second positioning, while on the other hand, startup loans do not. The SBA won't take second position either, but it does offer refinancing if certain terms are met.