 TITLE: How Do Small Business Loans Work? CONTENT: How to Qualify for a Small Business Loan\n----------------------------------------\nThe process of qualifying for a small business loan involves several steps that we'll outline below.\n### Build Your Personal and Business Credit Scores\nLenders that offer small business loans will take a look at your personal credit score to help them determine whether they should lend you money. Your personal credit shows your ability to repay your personal debts like your mortgage, car loans and credit cards. The higher it is, the less risky you are in a lender's eyes and more likely you are to get approved for a loan.\nSo, what constitutes a good credit score? While a score of 700 or above is considered good, a score of 800 or above is known as excellent. To find out where your credit score stands, visit AnnualCreditReport.com and obtain free copies of your reports from Experian, TransUnion and Equifax. You can also get a free credit report from Experian every 30 days.\nIf your credit score is lower than you'd like it to be, pay your bills on time, pay off debt and keep balances low on credit cards and other revolving credit. Also, refrain from applying for too much credit, as doing so can create multiple hard inquiries in your credit file and have a negative impact on your score.\nOnce you've built your personal credit, it'll be time to focus on your business credit score. To begin establishing business credit, incorporate or form an LLC, obtain a federal Employer Identification Number (EIN), and open business accounts in your business name.\n### Know the Requirements\nBy understanding a lender's minimum requirements and qualifications, you can increase your chances of getting approved for a small business loan. While some lenders may be flexible, most of them require that borrowers meet a minimum credit score, annual revenue and years in business.\nOut of all the types of business loans available, loans from banks and those that are backed by the SBA are the most difficult to qualify for. While the minimum credit score for these types of loans is typically 640, a higher score in the 700s or 800s is preferred.\nWhen it comes to small business loans from direct online lenders and peer-to-peer lending sites, requirements are less stringent. You may be able to get approved with an average or above average credit score in the low to mid 600s.\nIn addition to meeting credit score requirements, you'll need various legal and financial documents to complete the application paperwork. These documents will likely include things like your driver's license, a voided business check, bank statements, profit and loss statements, business and personal tax returns, and a business plan.\n### Develop a Business Plan\nThe purpose of a business plan is to show lenders how you plan to use your money. Your business plan will help convey the purpose of your loan and how you believe it will help you become more profitable. When creating your business plan, make sure to include the following information:\n*   Business description\n*   Product or service description\n*   Market analysis\n*   Management team\n*   Sales and marketing strategy and implementation\n*   Financial plan and projections\n### Provide Collateral If Required\nSome lenders require you to provide collateral or an asset like real estate, equipment or inventory to take out a small business loan. When you provide collateral, you give lenders the right to seize and sell it if your business struggles and you are unable to make your payments.\nTo take out an SBA-backed loan, for example, you must offer collateral in addition to a personal guarantee (from each owner, if there's more than one) of at least 20% of the business. This personal guarantee puts your assets and credit score at risk.\nIf you're worried about losing an asset or don't have one, an unsecured business loan, which does not require collateral, may make more sense—even though it may come with less favorable terms. END