Understanding Small Business Loan Requirements

While a business loan is different from a personal loan, you are likely to find that your ability to secure small business financing depends very much on your personal characteristics and history.

For one thing, in the absence of an established track record for a business, a lender’s willingness to extend your company credit is going to depend very much on your financial situation. This includes your current debt load and history of paying your debts. It may also include your ability to provide personal assets as collateral.

Another way a small business loan may depend on you personally is your ability to convince the lender that your plan for the business is viable. This comes down to your education, your experience, your ability to put together a well-conceived plan and your credibility in presenting it.

A small business loan may be a commercial transaction, but like many small businesses themselves, it is often highly personal to the business owners.

1. Your credit history Unless you have a profitable, well-established business, your personal credit history may have to make up for the absence of a company financial history. So, before you try applying for small business loans, check your credit score so you know where you stand and can address any problems.
2. Business plan Your company's ability to repay the loan will probably depend on the success of the business, so lenders are going to want to see your business plan. This should be a detailed strategic document which includes a marketing plan, competitive analysis and well-researched data on cost factors and price points.
3. Balance sheet Lenders need to see a list of the company's assets and liabilities so they can determine how well-resourced the business is and whether or not it is over-extended financially.
4. Cash flow history and projections A balance sheet is the equivalent of a financial snapshot at one point in time, but a cash flow statement is a more dynamic representation of whether a company is growing or stagnating, succeeding or failing. It is helpful if your business is well-established enough to have built up a cash flow history, but if not you will have to present credible projections that give the lender confidence in the company's ability to repay the loan.
5. Resource management The details of how your company processes payments and accounts payable shows a potential lender that you are (or are not) well-organized enough to make effective use of your resources.
6. Collateral Lenders are going to look for assets they can claim if you fail to repay the loan. It's best if the company itself has assets of sufficient value, but if not you may have to put up personal possessions as collateral.
7. Skin in the game Don't expect a lender to risk its money unless you also have invested significantly in the business.

Remember, the application process is largely about getting a lender to believe in you and your business. It is not just the substance of the above criteria, but also your thoroughness and organization in presenting them that can make a difference.