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Finding and applying for a small business loan can be time-consuming. By knowing lenders’ typical business loan requirements ahead of time, you can streamline the process and avoid potential frustration.
Here are seven things lenders generally look at to decide whether you qualify for a loan.
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1. Personal and business credit scores
You’ll likely need good personal credit (typically a score of 690 or higher) or excellent business credit to qualify for a government-backed SBA loan or traditional bank small-business loan.
Online lenders, on the other hand, can be more lenient with credit scores, emphasizing your business’s cash flow and track record instead. Some online lenders require a minimum personal credit score of 500.
Personal credit scores indicate your ability to repay personal debts, such as credit cards, car loans, and a mortgage. Small-business lenders require a personal credit check because they want to see how you manage debt.
FICO scores, commonly used in lending decisions, range from 300 to 850 (the higher, the better). You can get a free credit score on NerdWallet and a free copy of your credit reports at AnnualCreditReport.com.
Fast ways to build your personal credit include disputing any inaccuracies in your report and paying bills on time and in full.
More-established companies will have business credit scores (which generally range from 0 or 1 to 100) with credit bureaus such as Experian, Equifax and Dun & Bradstreet. Steps to building business credit include establishing trade lines and keeping public records clean.
2. Annual revenue
Many lenders will only consider businesses that bring in at least a minimum monthly or annual revenue.
How much cash flow you’ll need depends on the lender — for example, online lender OnDeck requires $100,000 in annual revenue to qualify for its line of credit, while Bank of America’s minimum is $250,000 for its secured business loans.
If you need a business loan with low revenue, you’ll likely have to rely on alternative financing options, like invoice factoring.
3. Years in small business
To qualify for a business loan from a bank, you’ll typically need to have been in business for at least two years. Online business loans tend to have less stringent requirements but still usually require at least six months in business.
4. Small Business industry and size
Every industry has a different risk level — and some industries, like restaurants and beauty services, can be considered high risk because they’re more likely to have inconsistent revenue.
There are also certain industries that many lenders don’t work with at all. These typically include adult entertainment, drug dispensaries or products, gambling, and money service businesses.
Government-backed loans from the U.S. Small Business Administration come with specific requirements. If you want to qualify for SBA loans, you’ll need to check a few additional boxes:
- Your business must meet the SBA’s definition of a “small” business, which varies by industry. You can find yours on the SBA’s website.
- You must be a for-profit company.
- You can’t operate in an ineligible industry, like real estate investing, gambling or religious activities.
- You must be current on all government loans with no past defaults you’ll be disqualified if you’ve been late on a federal student loan or government-backed mortgage, for instance.
5. Small Business plan and loan proposal
Lenders will want to know how you plan to use the money and see that you have a strong ability to repay. They may require a business plan that explains what your business goals are and how you plan to reach them. Some lenders may also ask for a business loan proposal, which details the purpose of the loan and how you expect to repay it.
These documents should clearly demonstrate that you will have enough cash flow to cover ongoing business expenses and the new loan payments. This can give the lender more confidence in your business, increasing your chances at loan approval.
6. Collateral or a personal guarantee
To qualify for a small-business loan, you may have to provide collateral to back the loan. Business collateral is an asset, such as equipment, real estate, or inventory, that can be seized and sold by the lender if you can’t make your payments. This is a way lenders can recover their money if your business fails.
For example, SBA 7(a) loans above $25,000 typically require collateral plus a personal guarantee from every owner of 20% or more of the business. A business loan personal guarantee requires you to repay the amount owed from your personal assets if the business can’t.
Some lenders offer unsecured business loans, which don’t require physical collateral but will likely still come with a personal guarantee. Lenders may also take a blanket lien on your business assets — essentially another form of collateral — giving the lender the right to take business assets (real estate, inventory, equipment) to recoup an unpaid loan.
Each lender has its own rules, so ask questions if you’re unsure what’s required.
7. Small Business and financial documentation
Banks and other traditional lenders typically require a wide range of paperwork when you apply for a small-business loan. The financial and legal documents you may need for a small-business loan include:
- Personal and business income tax returns.
- Financial documents, such as profit and loss statements, balance sheets, and income statements.
- Personal and business bank statements.
- A photo of your driver’s license.
- Commercial leases.
- Business licenses.
- Articles of incorporation.
- Proof of collateral.
- Business plan.
- Existing debt schedule, if applicable.
- Legal contracts and agreements.
- A resume that shows relevant management or business experience.
- Financial projections if you have a limited operating history.
Online lenders may provide a streamlined application process with fewer documents and faster underwriting.
Must Read:
- Best Startup Business Loan Options for Entrepreneurs
- 7 Things You’ll Need to Qualify for Business Loans 2023
- Business Line of Credit: Compare the Best Options
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