What to Know About Prequalifying for a Small Business Loan

In this article, you’ll learn:

What it means to be prequalified
How to get prequalified for a small business loan
How to qualify for small business financing
5 small business financing options

So, you’ve decided to get a loan for your small business… but you don’t want to go through the whole loan application process, only to find out that you don’t qualify for the interest rate, terms, and loan amount you expected.

By prequalifying for a small business loan, you can quickly find out where you stand.

What Does it Mean to be Prequalified?

Prequalification means that the lender has reviewed a borrower’s basic information to determine the likelihood of them qualifying for a loan. It’s possible to get prequalified in a few minutes or less, and while it doesn’t guarantee approval, it gives you a good idea of what’s possible.

How Do You Get Prequalified for a Small Business Loan?

The prequalification process varies depending on the lender. Here’s how the process looks at Biz2Credit:

You enter how much your business needs, what you need the funds for, and how long you need the funds for.
Provide your annual revenue, time in business, and credit score.
You click “get your offers.”

At this point, you find out how much you are prequalified to borrow – the whole process takes seconds.

How to Qualify for Small Business Financing

After you get prequalified, you can submit a loan application. Here are a few things that are commonly required by lenders to qualify for a loan:

Business Plan

A business plan details the long-term goals and objectives of your small business. This document is not only an excellent way for you to organize your thoughts, but also gives lenders an idea of the long-term viability of your company. Here are the sections in a typical business plan: an executive summary, company description, market analysis, organization and management, service or product line, marketing and sales plan, funding request (if you are seeking funding), financial projections, and appendix.

As you can tell, there are a lot of sections in a business plan, so developing this document may seem like an insurmountable challenge. But by reading other business plans and taking it one section at a time, creating a first-rate business plan becomes feasible. You also don’t have to do it alone; you can ask for feedback from other small business owners on your first draft.

Financial Documents

To qualify for a small business loan, you need to provide some financial documents. The required documents depend on the type of lender; an online lender typically requires less documentation than a traditional bank or credit union. Here’s what you may be asked to provide a lender:

Tax returns
Balance sheet
Income statement
Bank statements
Financial projections

If you lack the time and/or expertise to create financial projections, you should hire a Certified Public Accountant (CPA) to help you put them together – contrary to popular belief, they can help your small business beyond tax season.

Collateral

You may be asked to provide collateral – which is an asset that the lender can take if you fail to make your payments – to qualify for a small business loan, particularly if you seem like a “risky” borrower. While it’s possible to get an unsecured business loan, you typically need a high credit score and significant time in business to qualify for this type of financing – and you may still have to pay a higher interest rate to compensate lenders for the lack of protection if you default.

In some cases, lenders accept a personal guarantee as a substitute for business collateral. But by agreeing to a personal guarantee, you put your personal assets at risk – a non-starter for many small business owners.

5 Small Business Financing Options

Before you get started with the prequalification process, it’s good to learn about some small business funding options. You can get a sense of what types of financing would be a good fit for your small business, as well as your chances of successfully applying.

Here are 5 small business financing options:

1. SBA 7(a) Loan

The U.S. Small Business Administration (SBA) 7(a) loan program allows small business owners to borrow up to $5 million. The SBA guarantees up to 85% of the loan amount, so lenders can offer below-market interest rates.

But there are some issues with an SBA loan:

While you may be able to get an SBA loan with a suboptimal credit score, you might have a hard time qualifying for this type of loan with a bad credit score.
With an SBA loan, there’s a good chance you’ll be asked to put up collateral – so you should be comfortable with that likelihood ahead of time.
There’s a lengthy loan application process, and you might not get a decision for months in some cases.

With all that said, SBA loans are an excellent option for small business owners who can qualify and afford to wait. Here are some of the requirements of eligibility.

2. Term Loan

A term loan is one of the most popular types of financing options for small business owners. With a term loan, the borrower gets upfront cash and agrees to repay the funds on a set schedule at a variable or fixed interest rate.

This type of loan is offered by both banks and online lenders. A bank is likely to have a long application and review process (you may have to wait months to get funded), but offer attractive terms. An online lender, on the other hand, is likely to be able to provide funding a few business days after you apply – but the interest rate is often a little higher.

You can use a term loan for several purposes including:

Buy expensive equipment or real estate
Purchase inventory
Hire or keep staff
Debt consolidation
Refinance
Improve cash flow

The requirements to qualify for a term loan vary depending on the lender, but with Biz2Credit, most customers get started with annual revenue greater than $250k, a 660+ credit score, and at least 18 months in business. You should be able to access $25k-$500k in funding, low rates (as low as 7.99%), and payment plans ranging from 12 to 36 months.

3. Business Credit Card

A business credit card works similarly to a personal credit card, but it is connected to your business – not your personal life. While a business credit card is not ideal for long-term business needs, it can be an excellent way to meet short-term needs, such as a one- or two-week dip in working capital.

In many cases, you can get cash back, no foreign transaction fees, sign-up bonuses, and travel rewards via a business credit card – some or all of these benefits could be valuable, depending on your circumstances. If you’re doing a lot of overseas business travel, for example, a card with no foreign transaction fees would come in handy.

You need a good credit score to qualify for the best business credit cards.

4. Business Line of Credit

A business line of credit allows a small business owner to borrow up to a certain limit and only pay interest on the amount borrowed. This structure is ideal for small business owners who are unsure of their future business needs.

For example, you have to borrow money to meet working capital needs in some quarters… but not in other quarters. You could elect to take out a term loan, but you’d have to pay interest regardless of whether you were using the funds. But with a business line of credit, you’d only pay interest on what you need.

Here are the requirements for a business line of credit with many online funders: 580+ credit score, 12 months in business, $10,000 in average monthly revenue, collateral, and no recent negative credit events.

5. Merchant Cash Advance

A merchant cash advance (MCA) provides a small business owner with a lump-sum payment to be repaid through a percentage of future sales. In the past, MCAs were primarily used by businesses that relied heavily on credit or debit card sales. But that is no longer the case, as merchant cash advances are now available to small business owners who make a large percentage of their sales through other payment methods.

With a merchant cash advance, the amount to be repaid is based on the factor rate (usually between 1.2 and 1.5), not the interest rate. For example, you borrow $20,000 and the factor rate is 1.3 – the amount to be repaid would be $26,000 (20,000 * 1.3). Since MCAs are a short-term financing option, the APR is sometimes high double-digits or low triple-digits.

While it’s “expensive” to borrow money via a merchant cash advance, you don’t need to meet tough requirements – a credit score of 525-550 is likely to be sufficient.

The Bottom Line

There is a widespread belief that securing business funding is a long and arduous process; while this is the reality with many traditional banks, online lenders have streamlined the process of getting a business loan – from start to finish.

With Biz2Credit, you can get a quick turnaround time. Tejas Gandhi wanted to acquire a pharmacy, but didn’t have time to wait for funding to get approved… so he turned to Biz2Credit. Gandhi said, “The process to apply and get approved for the funding was simple, and that’s because Biz2Credit made it that way. They asked for the necessary application documents, and after that we were approved for the financing very quickly.”

After reading this article, you have a general idea of what financing options may be appropriate for your business. You can find out if you’re prequalified in seconds via the Biz2Credit website. After getting prequalified, it’s possible to create a profile and submit your application in a total of around five minutes. You can get a decision as fast as 24 hours, and get funded within 48 hours of final approval.

Learn more about how Biz2Credit can help your small business secure funding.