Information You Can Use: Eligibility Criteria for Applying for Small Business Loans

Small businesses are the backbone of many countries’ economies. In the United States, they employ half of the population and create up to 60 percent of all new jobs. North Dakota is one of the states with the highest number of small businesses making up more than 97 percent of all the businesses. Apart from its tax-friendly environment, small business owners have numerous avenues to access small business loans to grow their businesses. However, not every small business qualifies for a business loan. They need to present relevant business documentation and meet the minimum small business lending requirements.

The following essential loan requirements need to be considered when considering, or preparing, to apply for a small business loan.

A Good Credit Score

A credit score evaluates one’s ability to repay debts. Lenders use this score to determine the amount of credit to advance to a borrower. Since many small business owners don’t have business credit, the personal score becomes the evaluating factor. Normally, a personal credit score ranges from 300 to 850 and is a function of five factors:

  • Repayment history
  • Type of credit used
  • The length of credit
  • Amount of debt owed
  • Recent credit inquiries

This means small efforts like paying bills on time help build your credit score. Most lenders advance SBA loans to small businesses with a credit score of at least 600. However, some businesses have a lower credit score and can only access bad credit loans like peer-to-peer lending, invoice factoring, and equipment financing, to mention a few.

Solid Business Plan

Lenders want to know how you plan to use the borrowed money, and having a solid business plan should come in handy. The plan should show the company’s current and projected cash flows while demonstrating that it generates enough revenue to cover business expenses. Here are some highlights to include in a business plan:

  • The name of the business and a company description
  • Services or products offered
  • Industry analysis
  • SWOT analysis
  • Management team
  • Promotional, sales, and marketing strategy
  • Facilities and operations plan

Business History

Since many businesses fail within the first year, lenders require business owners to provide a business history. Typically, the minimum business age requirement to qualify for small business loans ranges from six months to two years. If the business has a business history of fewer than two years, it might not qualify for business lending from banks or traditional lenders. Note that lenders look at the period the bank accounts have been in operation, not how long the business has been registered.

Debt to Income Ratio

A business debt-to-income ratio plays a critical role in determining if businesses qualify for small business loans. While lenders require a 50% ratio or lower, most of them are still cautious when lending to businesses that already have other loans. Avoiding loans with high-interest rates and creating fail-proof payment plans goes a long way in keeping the debt-to-income ratio in check.

Lenders will also require the business to provide basic documentation like the balance sheet to evaluate the business’s financial health. It also helps determine if the business has enough cash to spend on available opportunities or if it should be saved for a rainy day. If the business can’t provide such documentation, the lender will require a personal guarantee from the business owner. This means that even if the business is registered as a limited company, the lender will pursue the business owner in case they default on the SBA loan.

Collateral

The lender will also require the business to provide collateral to back the small business loan. It can be in the form of inventory, equipment, buildings, or real estate. SBA loans in North Dakota require collateral and a personal guarantee of 20% or more of the business. This means the owner’s assets and credit score are on the hook, too.

When applying for small business loans, there’s no one-size-fits solution. While a good credit score and good cash flow help qualify for a reasonable loan amount, other factors like your debt-to-income ratio may disqualify a business from a loan. Keep in mind that lenders use different eligibility criteria, so shop around to find one that suits your business needs.

Let Lewis & Clark Development Group Help You

Let Lewis & Clark Development Group’s Small Business Assistance Team help you today. Contact Matt Burthold, LCD Group commercial lending director, about the North Dakota Opportunity Fund and our range of regional and special loan programs. Matt may be reached at (701) 667-7601 or at matt@lcdgroup.org.

For information about the SBA 504 loan program, contact our SBA loan officer Tracy Whitney at (701) 667-7602 or at tracy@lcdgroup.org.

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