Everyone knows you need a good credit score and a profitable business to have the best chance at a business loan. That’s not all you need to get lender approval though. A lot of business loan requirements aren’t as explicit as you may expect.
Whether you need startup loans, loans for working capital, or some other type of loan, If you keep getting denied and can’t figure out why to keep reading and you may find that you aren’t meeting one of the business loan requirements lenders don’t talk about.
Business Name and Contact Information Matters
One of the first small business loan requirements that a lot of business owners do not realize has to do with the name of their small business. Examine your small business name. Does it indicate a high-risk industry? If so, it could be keeping you out of the business loan game.
This may be true even if you are applying for an SBA loan. Lenders avoid risk as much as possible, and a name like “Bob’s Cannabis and Guns” is going to bring risk to mind immediately. Just use “Bob’s” instead.
Next, make sure you have a separate business phone number and that it is listed in all the local directories as well as the 411 directories. A toll-free number is even better. Don’t use your personal number.
Then, take a look at the business address you are using. A P.O. Box or something similar isn’t going to cut it. It needs to be a physical address where you can receive mail.
If you do not have a physical location other than your home, use your home address. If you would rather not, you can try a virtual address. Some lenders do not accept these, but some do.
Do Not Ignore the Importance of Legalities and Structure
If you ever want a small business loan, you have to make it real. Stop using your Social Security Number to apply for credit and get an EIN.
You may still need to provide both numbers, but your SSN will be for identity and fraud prevention purposes only in most cases. An EIN looks much more professional to lenders.
Then, incorporate. Forget about operating as a sole proprietorship or partnership. You need to organize as an LLC, S-corp, or Corporation. Lenders do not really care which one, but they want to see a corporate organization.
Talk with your attorney and tax professional to determine which structure type will work best for you based on your budget and liability protection needs.
Lastly, get all the licenses and permits you need to operate legally in your location.
Online Presence Can Make a Difference
While it may not be listed specifically on a loan application, your online presence can make a big difference. Loan officers might research before they send the application to underwriting, and if you lack or have an unfavorable online presence, there can be negative consequences.
What are they looking for? First, does your website appear professional or thrown together? Is it user-friendly? Then, do the business name and contact information match what is on the application? If not, your application may not even make it to underwriting.
While congruency on contact information is not typically listed as a business loan requirement, a lack of it can definitely cause issues with approval. Make sure your information is updated and listed the same way everywhere.
Unless you have experience building and designing websites, it may be wise to hire someone to handle this. Do not use a free website service, and to that point don’t use a free email service either. Your business email should have the same URL as the website.
There are Two Kinds of Credit Score
Many small business owners do not realize they have both a personal credit score and a credit score for their business. They go to the bank to get a business loan and just assume credit is credit.
However, there are two distinct types of credit, and lenders do not always let you in on what’s what.
Most everyone knows about personal credit scores. If you have bad credit on your personal report it’s going to be very hard to get small business loans of any type from a traditional lender.
Still, small business owners with a decent personal credit score may be surprised to find out they are still denied a small business loan.
The part lenders will usually not tell them is that it is because of their business credit score. Bad business credit makes it hard to fund your small business. No credit score for your business is just as bad as a poor credit score for your business.
The problem is, a business credit score doesn’t build passively like a personal credit score. You have to actively establish and build it. As it grows, you are more likely to get approval for business loans of various types.
Timing, Lender Selection, and Product Choice
The timing of your business loan application makes more difference than you think when it comes to the approval of business loans. For example, if you apply during a time when that specific lender is tightening up on lending, your chances of approval drop.
This can be affected by a number of factors, some that are going to be relevant to the entire business lending industry as a whole, and others that are relevant only to the specific lender. That means lender selection is also important.
Just as important is timing your application in relation to your needs. By all means, apply for funds before you need them. However, make sure you qualify as much as you can before applying.
Applying for the right loan amount and loan option, for example, secured business loans (need collateral) vs. unsecured business loans (no collateral needed), or a term loan versus invoice financing, can make a difference as well.
Choose Your Lender Wisely
Of course, this isn’t going to be on any list of loan requirements provided by a lender. However, when researching, you can determine whether or not a lender tends to work with businesses in your specific industry.
If you are in an industry that a lender doesn’t typically work with, they will not be as likely to approve the loan application. That includes lenders working with the Small Business Administration.
It can help if you have a preexisting relationship with them as well, including other accounts. Try applying with the institution that holds your business and personal accounts before you try others, assuming those other accounts are in good standing.
As for how lenient they are when it comes to lending at a specific point in time, the help of a professional like a Credit Suite business finance specialist can be valuable.
They have their finger on the pulse of the industry and can help you find the best lender for your small business at any given time.
Also, consider if there is a lender that offers a special loan program that may apply to your business. If so, why not start there?
Don’t forget about online lenders either. Online banking is common these days, and credit approval is often easier and faster, although in some cases funding comes with higher interest rates than what traditional lenders may offer.
Not All Bank Accounts Are Created Equal
Having a separate, dedicated business bank account is essential. First, lenders want to see money coming in and going out of your business, and they don’t want to weed through your personal transactions to do it.
A cash flow statement is only part of this. Seeing cash deposits go into a business bank account is vital to the underwriting process. It also gives an idea of practical time in business vs. how long your business has been in existence.
Most lenders require a dedicated business bank account anyway. It helps show that you meet any minimum deposit requirements and makes it easier for lenders and underwriters to track business finances, including cash flow.
Beyond tracking cash flow, your business needs its own account anyway for other reasons. There are a number of business financing options that require it.
Also, your business cannot take credit card payments without a business bank account, because you cannot have a merchant account without one. A separate account also makes it much easier to separate business transactions when you are doing taxes.
Make a Plan
There’s so much that goes into this. Of course, you need an official business plan that includes a ton of research and projections as well as financial statements. However, the key here is that you know how you intend to use the funds for your small business.
A business plan is more than a statement of how you are going to use the loan proceeds as working capital or for expansion. The lender wants to see how your loan approval will increase profitability long term. Your profitability is how they get paid.
As a result, they want to see from a business plan that you have a plan for the funds they are giving you. Lenders want to know you will use them wisely and that you have done the research to know how to best do that.
There are a lot of reasons you may be denied a small business loan. Some of these reasons are obvious. Many of them the lender will share with you. But there are plenty of times you may be denied a term loan and never know why.
In those cases, it’s likely one of these “secret requirements” hasn’t been met. Evaluate your business before you need financing, considering each of these requirements, and you may have better luck getting financing approval.
Remember a business loan is not your only financing option. You may be able to get a cash advance or accounts receivable financing.
Credit Suite can help you find other types of small business financing and funding, like vendor credit or a business credit card, that you may be eligible for this year.
Give us a call today and let’s see what we can find based on your credit and collateral. You might be surprised!