Traditional banks are not able to lend to businesses that are younger than two years old. However, alternative lenders can provide funding ranging from $500 to $50,000 and even more, depending on the project. If you are looking for funding, check out your state’s SBA preferred lenders list. SBA-preferred lenders have been vetted, are not predatory, and are aimed at helping you start and grow your business. If you think you may need funding at some point, get in touch with local lenders and get informed. Each lender will have its own criteria, but the information below should prepare you for most of them.
You and every person owning 20% or more of your business will likely need to provide some or even all the following information. As will any co-signer or guarantor.
Credit
Many alternative lenders can work with a credit score of 580 or less. Red flags for a lender are accounts in collection, auto repossessions, foreclosures in the past three years, and bankruptcies. Other barriers are any default in federal debt, like owed taxes or student loans. You can owe the money, but your payments must be current. If you are in default on federal debt or in collections with any debtor, get on a payment plan. You will need to get current and have a few months of good payment history to show the lender.
TIP: Don’t wait until you need a loan to get your accounts in order. That can often take several months and be a roadblock to getting the funding you need.
Collateral
debt to income ratio
This shows the lender how much money you must have to make the loan payments. It takes all your income, the amount of debt you owe, and what you have left over. They will not look at all your debt, like cell phone bills or cable, but they will look at mortgages, rent, car payments, and credit cards. A debt-to-income ratio of 35% or lower is usually preferred.
TIP: If you have a job other than your business and think you might need outside funding, do not quit your job yet. Your job is a steady source of income, and the lender will want to see that you can repay the loan.
3 Months' Bank statements
2 to 3 years of tax returns
You must have tax returns. Even if you made less than the amount required by the IRS to file, most lenders still want them. If you are already in business, be careful with write-offs and deductions. They may be great for tax purposes and saving you money, but they can work against you should you need a loan. Make sure you hire an accountant to help you plan ahead, just in case.
Business Plan
Depending on the loan amount, you may need a business plan. It doesn’t have to be elaborate or extensive, but it does need to cover the basics.
See the section on Business Plans for more info.
personal guarantor
Business loans always need a personal guarantor. If the business closes, you and anyone else on the loan will still be responsible for the payments. Due to this, late payments on your business loan may also appear on your personal credit score.
personal contribution
The personal contribution can also be money already put into the business, such as business licenses, marketing materials, websites, inventory, and any business-related purchases. Your lender can give you a list of accepted contributions. You will need receipts and possibly corresponding bank statements.
TIP: Save all your receipts and pay with a card or check. That creates a clear paper trail for the purchases. Paying with cash makes it impossible for a lender to verify your personal contribution and business purchases. You always want a paper trail – not only for lenders but also for future audits. It also makes your own bookkeeping so much easier.
TIP: Pay personal things from your personal account and business things from your business account. If you go to Costco and buy tons of business supplies and a box of cookies, pay for them separately. Lenders will often go through your receipts line by line. It also shows them that you can separate your finances responsibly.
TIP: If you paid for personal things with the business account by accident or due to an emergency, it’s easy to fix. Transfer the amount from your personal account to your business account, with a note stating what the transfer is for. Make sure it does not happen regularly. Ideally, never again.
Background Checks
TIP: Always be open and honest with a lender. Tell them what they will find in your credit report or background check. If they know, they can advise and help you. Sometimes, it’s just a matter of waiting for some time to pass. However, suppose they find something they should have heard from you. In that case, they may question your character, decide you are not trustworthy and deny the loan that might have been approved otherwise.
