How to qualify for a small business loan: 7 essential tips

What do lenders look for?

Before you apply, it helps to think like a lender. Financial institutions generally evaluate your application based on the "5 Cs of credit":

1. Character: Your credit history and reputation.
2. Capacity: Your ability to repay the loan (cash flow).
3. Capital: The money you personally have invested in the business.
4. Collateral: Assets you can pledge to secure the loan.
5. Conditions: The purpose of the loan and the local economic environment.

7 steps to qualify for a business loan

Based on industry standards and Small Business Administration (SBA) guidelines, here are the seven steps you should take to ensure you are loan-ready.

1. Clearly define the purpose

Lenders need to know exactly how the funds will be used. "Growing the business" is too vague. Be specific. Do you need to purchase inventory for the holiday season? Are you buying a new delivery van?

💡 Tip: Match the loan term to the useful life of the asset. Don't finance short-term inventory with a 10-year loan.

2. Check both credit scores

Lenders will review both your personal and business credit scores.

• Personal credit: A score above 680 is typically preferred for traditional bank loans.
• Business credit: Ensure your business has a separate credit profile (like a D&B D-U-N-S Number) to show you pay vendors on time.

3. Prepare a solid business plan

If you are a startup or seeking a significant amount of capital, a business plan is non-negotiable. It proves to the lender that you have a roadmap for profitability.

• Include: Executive summary, market analysis (who are your competitors in Indiana or Michigan?), and financial projections for the next 3 to 5 years.

4. Calculate your debt service coverage ratio (DSCR)

This is the math lenders do to see if you can afford the loan. They compare your net operating income to your total debt obligations.

• The formula: Net operating income divided by total debt service.
• The goal: A ratio of 1.25 or higher is the standard benchmark. This means for every dollar of debt, you have a dollar and twenty-five cents in income to cover it.

5. Gather your financial documents

Speed up the approval process by having your "loan package" ready before you walk into the branch. Common requirements include:

• Personal and business tax returns (last 2 to 3 years).
• Profit & Loss (P&L) statements.
• Balance sheets.
• Bank statements (last 6 months).
• Legal documents (Articles of Incorporation, business licenses, etc.).

6. Decide on secured vs. unsecured

• Secured loans: Require collateral (equipment, real estate, cash). These often have lower interest rates and are easier to qualify for.
• Unsecured loans: Do not require collateral but rely heavily on your creditworthiness. These typically carry higher rates and stricter approval standards.

7. Invest your own capital

Lenders want to see that you have "skin in the game." If you are asking for a loan but haven't invested any of your own money, it signals higher risk. Having significant personal equity in the business increases your chances of approval.

Why choose Everwise Credit Union?

As a member-owned cooperative serving Indiana and Michigan, Everwise Credit Union looks at more than just a credit score. We understand the local market nuances, from the auto industry supply chains to the agricultural cycles of the Midwest.

We offer:

• SBA Loans: Government-backed loans with favorable terms.
• Business Lines of Credit: Flexible working capital when you need it.
• Commercial Real Estate Loans: For buying or refinancing property.

Ready to grow? Visit your local Everwise branch or check our online business resources to start your application today.