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Taking Your Business From CDFI Loan-Ready to Bank Qualifying

At the beginning of this summer, we started the funding journey of small businesses, which has three main stops: Self-funded businesses, CDFI loan-ready businesses and Bank-qualifying companies. We discussed the journey from self-funded to CDFI loan-ready as well as the emotional personal transformation that business owners go through during this part of the journey. Now we’ll explain the last leg of this journey and what it means to become a bank qualifying business.

Why strive to become a Bank-qualifying business?

In a word: options. It opens up the possibilities for growth, resilience, and profits.

Qualifying for bank loans means that you can access larger amounts of capital, which you can use to grow your business. Bank loans can help you increase capacity, develop a new product or service, expand into new markets, or even generate a healthy business cash flow. You could also tap into bank loan funds to sustain your business during hard times and crises.

If you can’t access bank funding, you have fewer options to keep your business going when revenue dips (unless you’ve built solid cash reserves). Remember that asking for a loan when you need it generally decreases your chances of approval. So it’s in your best interest to get qualified before a crisis hits.

Being bank-qualifying also means that you pay less for the dollars you borrow, and you pay them back under terms that benefit your business without draining your cash flow. Without access to bank loans, you’ll be limited to borrowing smaller amounts that might not support larger expansion plans. Or worseyou’ll turn to private lenders that charge 3 or 4 times more than traditional banks and lenders.

What does it take to qualify for a bank loan?

Every bank has specific requirements, but there are some general conditions that they look for businesses to have when they apply:

  • Having operated for at least two years with solid financials

  • Registered in accordance with the legal organization of business

  • Filed tax returns showing healthy profits with a growth trend for the last two or three years

  • Financial statements showing a healthy business for the last two or three years, with the ability to repay current and requested debt

  • Bank statements showing no overdrafts or mixing of personal expenses for the past several months

  • Annual revenues that support the amount of the loan request ($250,000+ for businesses with less than 5 years of operations and closer to $1 million for more established businesses)

  • Loan request amounts that align with the business’s financial reality, industry and ability to repay, means to pay back among other factors

  • Business owners that file their personal taxes, manage their credit history, and maintain credit scores in the high 600 or above

  • Collateral to secure the loan or capital investment for the project that is being funded

  • A business plan that clarifies your current business situation, trajectory and outlook, and reflects plans for healthy and realistic growth

How does a business prepare to become Bank-qualifying?

Below are a few key strategies to become a Bank-qualifying business:

  • Keep your books up to date and seek the counsel of a trusted Certified Public Accountant.

  • File your personal and business tax returns accurately and on time.

  • Choose your tax deductions wisely. Stacking deductions might give you short-term relief but could hurt your chances for bank approval if it shows that your business is not profitable.

  • Maintain separate bank accounts for your business and for your personal finances.

  • Pay yourself. Even if you’re not on the payroll in your business, you can set up regular payments to yourself in set amounts so that you can pay personal expenses separately.

  • Manage your cash flow so you don’t overdraft your account. It sends the wrong signal.

  • Pay your bills on time and manage your credit wisely to build or maintain good credit and demonstrate that you know how to handle debt.

  • Build capital to show you have a percentage or down payment for the project cost that you’re requesting loan funding for.

  • Develop a relationship with your bank so you can get help with the loan application process.

The journey to becoming a bank-qualified business is a long one. But with the right vision, determination, consistency and support, you can eventually get there.

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