Need funding? Then your first stop might be to head to your local bank to see if you’re one of the best candidates for a local small business loan. And that makes sense, since banks tend to offer great rates on their loan products. But it can be pretty hard to get one of these local business loans, whether that’s a term loan or a highly coveted SBA loan, since they’re both so in demand.
That said, difficult does not equal impossible.
Thousands of small business owners get high-capital, low-interest term loans from their local banks every day. These small business owners didn’t necessarily fit into one borrower profile, but they’re great candidates for local business loans because they have a few things in common.
And that all boils down to the idea that the best candidates for local business loans present the lowest risk to the lender. These candidates run financially secure businesses, they’re responsible with their financial obligations, and for SBA loans, their businesses meet all the US Small Business Administration’s standard requirements.
That might sound pretty vague, so we’ve tried to get as specific as possible here. To help know whether your business will be among the best candidates for a local business loan, you’ll want to be able to tick off most—if not all—of these six qualities.
Before knowing what it takes to get a small business loan, let’s do a quick review of what kinds of loans your local bank is likely to offer:
Term loans are a bank’s bread and butter. As the borrower, you’ll get a lump sum of cash deposited directly into your bank account. That gets repaid according to a set repayment schedule, usually at a fixed interest rate.
The exact conditions of your term loan—like the amount of available capital, the length of your repayment period, and the interest rate—depends upon a variety of factors. But generally, these loans are pretty big—sometimes they can go into the millions of dollars for the most qualified borrowers.
First, all lending institutions have their own loan criteria. Then, if you’re accepted (which is, admittedly, pretty difficult), your risk as a borrower will be evaluated based on your business’s financial history and profile as well as the loan program you’re in, if that applies.
Only the candidates with the strongest applications will be considered for a bank loan at all. And only the strongest of those businesses will qualify for the longest repayment terms, the lowest rates, and the highest amounts of capital.
If you’re a small business owner seeking a long-term loan, you’re probably going to apply for an SBA loan. And you should! It’s literally the Small Business Administration’s job to extend loans and other types of support to small business owners across the country.
Here, although a local bank is still granting you the actual financing—not the SBA itself—the government agency is partially guaranteeing the bank loan with federal money in case of default. That means the lending institution, aka the bank, is taking on less risk when they accept an SBA loan application.
That all translates into really good repayment terms. If you’re qualified enough to secure one, your SBA loan will carry the longest repayment period, the lowest interest rate, and the highest capital amount available than any other type of loan.
But you can’t always get what you want—especially if thousands of other people want the same thing. Because SBA loans are so in demand, banks receive huge numbers of applications every year. So, they’re in the privileged position to lend money to only the most desirable candidates, who meet a long list of predetermined requirements.
→Too Long; Didn’t Read (TL;DR): The two most commonly offered bank loans are traditional term loans and SBA loans. Both are desirable and popular—which means both are hard to qualify for.
How do you know if you’re among these storied “most eligible borrowers” we keep talking about? Unfortunately, there’s no actual magic involved. In this scenario, “most eligible” really means “lowest risk.”
Because that’s what a bank is doing when they extend a small business loan—they’re taking a risk. They’re trusting that you, the borrower, are responsible and financially secure enough to repay your debt in full and on time. That risk increases, of course, when the bank is lending higher amounts of capital and the repayment period lengthens.
And since the bank can’t know everything about you and your business, they have to base their decision on some set of standards—which is why your credit profile and financial history ends up mattering so much. Those things tell the story for you, or at least part of it.
So, in that sense, the best candidates for local business loans are really what banks deem as the lowest risk. Ultimately, what “safe” means will be at your bank’s discretion. But, in general, the most promising candidates for local business loans have these six qualities in common.
For a bank to deem your loan less risky, they’re going to want to see that you’re making money.
Profitability is essentially a measure of how well a business can generate a profit in relation to its expenses. Although there are a few methods for how to determine whether your business is profitable, regardless of which you use, banks will be looking for it.
Profitability is a key metric by which banks determine loan eligibility, since the lender needs to feel as confident as possible that your business can handle repaying your debt. That’s especially crucial for longer-term loans, since those capital amounts can reach into the hundreds of thousands—if not millions—of dollars.
If you want to be the best possible candidate for a local business loan, credit is king.
You have a business credit score, right? (Check it here, by the way.) For that reason, it might seem oddly intrusive for a lending institution to scrutinize your personal creditworthiness in an application for a business loan. But try to put yourself in the lender’s shoes.
At its heart, creditworthiness signals how you’ve handled money in general. If you’ve repaid debts, declared bankruptcy, defaulted on loans, paid bills on time, etc.
You’ll want to be in excellent credit standing—think high 600s-plus for a local bank loan. For an SBA loan, too. But, as with all things credit-score related, the higher the better. The best candidates have a very solid credit history, or have worked hard to rebuild credit history if they’ve had past missteps.
You’ve probably figured out by now that banks are always trying to mitigate risk. So, when banks see instability in your business’s financial profile, they could interpret it as an indication that you might not be able to repay your loan.
Other than your credit scores, some things that a local bank will be looking out for include:
In addition to a strong financial profile, a lender will probably also want to see that you’ve personally invested in your company. That indicates a seriousness in and commitment to your business—and business owners with a personal stake in the company are often more likely to give their all to make it succeed.
Of course, no one plans to default on their loan. But just in case, the lender needs to know that they have a safety net if the borrower fails to repay their debt.
In that case, the best candidates for local loans have strong collateral to put up—whether those are business or personal assets. (That’s situational, FYI.)
Since these loans are often on the larger size, borrowers have to take a risk on their end, too—since taking out a lot of money means collateralizing your house, maybe, or putting a blanket lien again the business.
Mature, profitable businesses are considered more reliable than immature, profitable businesses. That’s why the best candidates for local business loans aren’t startups.
Considered from the lender’s perspective, that makes sense. Basically, if you’ve managed to keep your business growing for 10 years, that demonstrates a much longer track record of reliability than a business that’s only been booming for a year or two. Plus, they have lots more financial data to look through and see patterns.
In addition to a sign of your business’s stability, time in business is also indicative of your experience within your industry. Lenders feel safer signing onto a borrower who deeply knows the ups and downs particular to their field—and how to capitalize on the ups and weather the downs.
When you apply for a local bank business loan, the lending institution will ask you for a slew of credentials demonstrating your business’s eligibility.
So, in addition to a stellar financial portfolio, the best candidates for local business loans need to have a rock-solid use case for the funds. Maybe there’s evidence for opening up a second location, or maybe the business needs to double its payroll. Whatever! But make sure it’s justified.
And you can be sure the bank will want to know, in detail, all about that plan. The best way to prepare for this is to show them an in-depth business plan, which you’ll share with your bank. Here, you can strategically map out your goals over the next three to five years and outline an action plan for how to meet them. Prove you’re organized, thoughtful, and serious.
→TL;DR: The best candidates for local bank business loans have qualities that signal to the lender that they’re low-risk borrowers. They have a strong business history, strong credit history, and a strong business plan. All of that signals that the bank will get their money back.
Some parts of having a “desirable profile” to be the best candidate for a local business loan is subjective. But there are some things that are simply non-negotiables.
Because SBA loans are government backed, the Small Business Administration does have some specific guidelines in place. They do vary from loan product to loan product—for instance, SBA 7(a) loan requirements are different than those for an SBA microloan—so you’ll have to check in.
Here’s a quick overview at what some of those are:
Here are more details on the three types of SBA loan programs so you can explore the requirements.
It’s also worth noting that local banks have their own requirements, too—just like these. They’ll also define size by their own terms, and sometimes restrict lending in certain industries. You’ll have to talk to your local bank to see if you’re still one of the best candidates based on those requirements.
→TL;DR: Make sure to check the specific requirements of the loan product you’re applying for, specifically SBA loans. There may be some non-negotiable boxes you have to check, too.
The truth is, the vast majority of small business owners can’t meet all—or even most—of these qualifications. And if you’re a part of that majority, don’t worry!
Bank loans are certainly not your only option. If you’re looking for a small business loan, explore these options:
It’s common for small business owners seeking loans to be turned down by banks. That’s one of the reasons for the rise of the online lending industry. Alternative lenders exist to serve the thousands of small business owners whose financial needs aren’t being met by conventional lending institutions.
Term loans with alternative lenders work the same way as they do with banks: You receive a lump sum of cash, at a set interest rate, which you repay on a schedule determined by the lender. But eligibility requirements are less stringent with newer, online lenders than they are with traditional banks.
Because these are great products, you’ll still need to show a strong financial profile. Here’s a look at an average set of qualifications:
But over the past five years, alternative lenders have accepted an average of 60%-64% of small business owners’ loan applications. That’s a big improvement over the 13%-20% of applications approved by banks.
A short-term loan is another variation of that traditional term loan. But, typically, it’ll be easier to qualify for than a long-term bank loan.
That’s mainly because short-term loans are much less risky for the lender than long-term loans, since they’re both furnishing less capital, and doing so over a shorter time period. And the max you can really shoot for with a short-term loan is around $250,000.
True to its name, the short-term loan gives you less time to pay off your debt—usually 3 to 18 months. These are also more expensive than longer term loans, as interest rates usually begin at around 10%.
If you’re not the best candidate for a local business loan because of your credit score, then a short-term loan might be the way to go. Average borrowers are qualified with:
And, if you are vigilant about repaying on time, you can build your credit to graduate into a long-term loan.
If you’re looking to secure a local business loan to make a big equipment purchase, but you don’t think you’ll qualify, then apply for equipment financing.
With a specific equipment loan, you submit the information on the specific piece or pieces of equipment you want to purchase, the lender gives you the thumbs up, and you get the money to do it.
Here’s the interesting part, though. The equipment itself serves as collateral, which means you don’t have to put up any additional collateral. So, if you default on the loan, the lender can repossess the equipment, making it lower risk for them—and a less expensive alternative for you. Average borrower profiles generally look like:
Although it’s not as easy to qualify for as a short-term loan, it is generally less expensive, and if you’re looking into bank loans, you just might have the qualifications lenders want.
→TL;DR: Bank loans aren’t your only options. You can explore term loans, short-term loans, and equipment financing through alternative lenders, which might be able to get you the financing you need.
Well, that’s up to your local bank, of course. But banks will only extend loans to the lowest-risk candidates.
Banks see these business owners as the most low risk, aka the best candidates:
If you don’t meet all of these requirements, you still have lots of options to explore for small business financing. And these other loans can help you build your credit—eventually graduating you into a local business loan after all.
Caroline Goldstein is a contributing writer for Fundera.
Caroline is a freelance writer and editor, specializing in small business and finance. She has covered topics such as lending, credit cards, marketing, and starting a business for Fundera. Her work has appeared in JPMorgan Chase, Prevention, Refinery29, Bustle, Men’s Health, and more.