What does it take to qualify for a business loan?

What does it take to qualify for a business loan? Answer: Start by understanding that this area is governed by banking law designed to protect depositors’ money from banks taking too much risk. So most of what they require is not up to them and not a matter of how good your business is or isn’t.

Sure there are exceptions, but here’s the general rule: For banks, it’s about guarantees, collateral, and credit ratings. To get a standard commercial bank business loan you have to have a decent personal credit rating and assets to pledge. That means you have to have business assets, like accounts receivable or inventory, to guarantee that loan. And the banks will look at the quality of the accounts receivable (companies that owe you money) and inventory (can you really sell it and is it valued correctly).

One major exception is when a bank is connected to the Small Business Administration (SBA) and can get you an SBA-guaranteed loan. The SBA guarantee is one way to get around the normal constraints. To find out about that, ask your favorite small business bank. Thousands of commercial banks work with the SBA and that’s where you go to apply. If the bank you normally use isn’t helpful, call a different bank. The banks arrange the whole deal so you don’t deal directly with the SBA.

By the way, in my experience an entrepreneur looking for commercial credit should expect to pledge his or her personal assets. We’re told in theory that having a corporation or LLC protects your personal assets from business risk, but in practice the vast majority of banks will insist on a personal guarantee. If you object, you have dignity but not a loan. My wife and I signed personal guarantees that put liens on our house over and over, even after we had a corporation that was profitable, selling multiple millions, and had no other debt. The bankers said “if you don’t believe in your company, neither do we.” We finally outgrew that, but the business was more than 10 years old by then, and they still needed hard assets as collateral.

Of course there are alternate ways to get loan financing for a new business, aside from banks. Look into innovative angel investment as loans or convertible loans, factoring, leasing capital equipment, and receivables-based credit lines (a variation on factoring).