How to Qualify for a Business Loan

Just because you apply for a business loan, there’s no guarantee that you’ll get approved for it. According to research cited by Small Business Trends, banks only approve about one-quarter of all small business loan applications. It can be frustrating when you spend time and energy applying for a loan, only for the lender to reject your application. If you’ve run into this problem, there are ways to increases your chances. Today we’ll take a closer look at how to qualify for a business loan.

How to Qualify for a Business Loan

Check Your Credit

Before applying for a business loan, check both your personal credit as well as your business’s credit. You can get a free credit report of your personal credit from all three major credit bureaus — Experian, TransUnion and Equifax — once a year from AnnualCreditReport.com.

To check your business’s credit, though, you’ll need to pay for a report from Experian, Equifax and/or Dun & Bradstreet.

Evaluate Debt-to-Assets Ratio

In addition to checking your credit, you should also evaluate your business’s debt-to-asset ratio. Also known simply as debt ratio, this metric refers to your business’s total liabilities relative to its total assets. You want your business’s debt-to-assets ratio to be lower than 1, meaning the value of your business’s assets is greater than the cost of its debt. If it’s higher than 1, lenders may disqualify you for a loan, believing that you’ll struggle to repay it.

Consider Using Collateral

You’ll have an easier time qualifying for a business loan if you use collateral. Collateral is essentially something of value that used to secure a loan. Real estate developers often use property as collateral, for example. They still retain ownership of the property. But if the developer fails to repay the loan, the lender can take ownership of it to protect against financial loss.

Many lenders are hesitant to loan money to a new business, simply because the business hasn’t proven its ability to generate profits.

Using collateral, however, provides lenders with financial reassurance, thereby increasing your chance of getting qualified for a business loan.

Inquire About Qualification Requirements

When you’re ready to get a business loan, contact several lenders to inquire about their qualification requirements. You’ll probably discover that banks have more stringent requirements than private lenders. Banks generally require a higher credit score and a lower debt-to-assets ratio than private lenders.

By contacting a private lender directly, you’ll know exactly what criteria you will need to meet in order to qualify for a business loan.

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