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The Secret Recipe to Qualifying for a Short-Term Business Loan

Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

Short-term business loans have become more and more popular compared to their traditional 5-10 year term loan cousins, but many small business owners might still be feeling unsure of what they need to qualify. There are plenty of reasons why short-term loans are attractive to small business owners, like the fact that shorter loans could provide more future flexibility—as borrowers won’t be tied down with ongoing loan payments for the next 5 or even 10 years.

The caveat is that, while they have shorter terms and might offer more flexibility, short-term loans are substantially pricier than their medium-term cousins, and often come with daily or weekly instead of monthly payments.

So what specifically do lenders look for when you apply for a short-term loan? Let’s take a closer look at the qualifications you’ll probably need to meet in order to secure a short-term loan—along with some of the most common potential deal breakers.

Qualifiers For Short-term Financing

Short-term loans can be a versatile option for your short-term financing needs, ranging from upgrading your technology and equipment to taking advantage of new business opportunities. Here are some of the loan qualifiers you should be aware of:

  • One of the most common qualifiers for a short-term loan involves revenue. Lenders like to see regular deposits of at least $7,000 per month routed into a business bank account. This helps establish that a business is healthy—so the lender can feel confident that your business has the cash flow to make good on any loan obligations.
  • It also helps to have some kind of proven track record. To that end, lenders like to see these deposits of $7,000 or more occur for at least 5 consecutive months, which shows that your business is consistently strong and not prone to wild swings in revenue. A business that reaches $7,000 one month but only hits $3,000 the following month demonstrates that it might have a tough time meeting a repayment schedule.
  • As with virtually any other money borrowing scenario, credit history is also vitally important. What this means is that short-term lenders will usually require that borrowers have a personal credit score of at least 550. That’s not a terribly high barrier to cross, though, since 550 is substantially lower than the minimum threshold to obtain a mortgage, for example.
  • Lenders also like to see that a small business is fairly stable, if not immediately profitable. Having an average balance of at least $1,000 in a business bank account is one way that borrowers can prove stability. This requirement helps establish that a business isn’t so undercapitalized that its own viability is continually in question.
  • Along these same lines, lenders will want any negative balance days to be very limited—fewer than 5 over the last three months. Potential borrowers who are constantly overdrawn are usually in pretty dire straits, and tend to make poor candidates for timely repayment.
  • Finally, any existing outstanding debt will also be factored into the equation. Low debt load is a positive and will help a borrower lock down new financing.

Short-term Loan Deal Breakers

Just as there are positive qualifications that could help a borrower quickly secure short-term financing—high credit score, high bank balances, and so on—there are also plenty of negative attributes that would sink most applications.

  • One of the most obvious is the lack of a business bank account. Every business should have one, for a metric ton of legal and tax reasons,—the most basic of which is just simplicity. But in the case of securing a loan, it’s especially important to keep your personal and business funds separate. This kind of financial commingling is a big red flag to lenders.
  • Additionally, the lack of a business tax return or personal tax return will be an issue. Most lenders need you to provide tax returns for the last few years.
  • Many lenders will also require that articles of incorporation be filed with an attorney or service provider. Incorporating gives important liability protections to small business owners. This helps put lenders at ease, since they no longer have to worry about a borrower being completely and utterly exposed—and unable to pay a loan back—in the event of a lawsuit.
  • Once incorporated, it’s important to remain in good standing with the Secretary of State’s office. Lenders will often ask for a certificate of good standing from the relevant state office, and the absence of one could be a dealbreaker. A certificate of good standing lets a lender know that a borrower has filed all necessary reports, paid all fees, and is authorized to do business in the state.
  • Slow responsiveness is also a major red flag for lenders. If a borrower fails to act in a timely manner in everything from documentation requests to payments, lenders will often decide that the borrower is an unnecessary risk.
  • Finally, lenders might frown upon the notion of operating multiple businesses under the umbrella of one corporation. Those in need of outside small business funding should keep this in mind when they decide how to structure any corporation.

***

There are many great benefits to short-term lending. But the qualifications—and the potential deal breakers—aren’t always so crystal clear. By reviewing the information outlined above, small business owners can apply for their next short-term loan with confidence.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

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