Business Loan Requirements: What Lenders Want to See
Build strong business credit
with your EIN
A business loan can provide your company with financial solutions for many different situations. Yet before you can take advantage of thisl, you’ll need to figure out how to qualify for a business loan.
Each lender has its own criteria when it comes to approving loan applicants. Below, you’ll find nine common business loan requirements that your company might need to satisfy to qualify for this versatile type of financing.
Requirement #1: Credit Score
One of the first details a lender will consider when you apply for financing is your creditworthiness. And with small business loans, a lender may want to examine your business credit score and your personal credit score.
A credit score helps a lender predict the risk of doing business with a loan applicant. Higher credit scores indicate less risk and could help you qualify for better loan offers.
Bad credit scores, by comparison, could make it more expensive to borrow money. In some cases, bad credit might make a lender turn down your loan application for business financing.
Minimum credit score requirements will differ from lender to lender. You might be able to find online lenders that are willing to issue business loans to borrowers with a FICO® Score as low as 500.
A traditional lender, such as a bank or credit union, might have stricter credit score requirements. It’s not unusual to need a 680 personal credit score or above to qualify for a business loan.
Business credit score requirements for business loans can also vary. Yet, again, higher credit scores could help you qualify for business financing and secure a better loan term.
For example, your business might need a PAYDEX Score of 80 or higher with lenders that require good business credit scores. Other lenders might work with riskier business credit profiles or be willing to help companies that need to build business credit from scratch.
Requirement #2: Time in Business
Another factor that a lender will examine when you apply for funding is your company’s time in business. A LendingTree analysis of U.S. Bureau of Labor Statistics data finds that one in five businesses in the United States fails within their first year.
Based on those statistics, companies with longer track records tend to be considered less risky in the eyes of a lender. Yet there can be a lot of wiggle room when it comes to exact loan requirements in this category, as outlined below.
- Online lenders may want a company to have a minimum of six months in business before approving a business loan application.
- A few online lenders might be willing to work with business startups.
- Traditional financial institutions may prefer to work with businesses that have been established for at least two years or more.
The longer your company has been around, the more financing options may be available to it. Business owners who established their companies some time ago may also be able to lock in better loan terms on a term loan, business credit card, business line of credit, and more.
Requirement #3: Annual Revenue
The amount of revenue your company earns will most likely play into the decision processes of most lenders when you apply for a business loan. Again, online lenders tend to be more lenient where business revenue requirements are concerned.
Traditional lenders may require your company to have at least $100,000 in annual revenue (or more) to qualify for business financing. Yet online lenders may be willing to work with businesses that earn less — perhaps as little as $50,000 in annual revenue.
Requirement #4: Debt-Service Coverage Ratio
It isn’t just the revenue that your business earns that matters on a business loan application. A lender will need to know more to determine your capacity to repay the funds you’re asking to borrow.
The way your business revenue relates to the debts your company owes is a critical detail that lenders may consider when you apply for business financing. This relationship between your company’s income and its debts is called the debt-service coverage ratio (DSCR).
A DSCR ratio of more than one tells a lender that your business has enough money after expenses to pay its credit obligations. If your business has a DSCR of less than one, it may signify a negative cash flow.
Lenders have different requirements where DSCR figures are concerned. With SBA lenders, for example, your company will need a DSCR of 1.15 or higher to qualify for an SBA loan. Other lenders, however, may have different requirements.
Requirement #5 – Debt-to-Income Ratio
You may need to sign a personal guarantee when taking out a business loan, merchant cash advance, or other form of business financing. When you sign such an agreement, you could be personally liable for the debt if your business doesn’t pay as promised.
(Prefer to keep your business and personal credit obligations separate? There are ways to build business credit without using personal credit.)
If a personal guarantee is involved, a lender may also care about your debt-to-income (DTI) ratio. A DTI ratio measures the relationship between your personal income and debts.
A lower DTI tells lenders that you may have more capacity to borrow money and repay additional debts. A high DTI ratio, by contrast, could indicate that your budget is strained and you might not be able to afford additional debt.
The exact DTI ratio requirements you need to satisfy probably won’t be the same from one lender to the next. Some lenders may consider a DTI ratio of 43% or less to be acceptable for business loan applicants. Others might have differing requirements.
Requirement #6: Collateral
Depending on the type of business loan you’re considering, you may need to provide the lender with collateral. Unsecured loans do not require you to pledge any assets for the lender to seize in the event of a default. With secured loans, however, collateral is a must.
Putting up collateral might help you qualify for a business loan or perhaps qualify you for a lower interest rate or better loan term. Yet the type of collateral a lender may be willing to accept depends on a number of factors.
Some of the items a lender might require (or accept) as collateral include the following:
- Equipment
- Vehicles
- Real Estate
- Cash or Cash Equivalents
- Inventory
- Etc.
In addition to specific pledges of assets, some lenders might require a blanket lien when you take out a business loan. A blanket lien essentially gives the lender a claim to any of a business’s assets in the event of nonpayment.
Requirement #7: Loan Purpose
Many lenders may allow you to use a business loan for a variety of different purposes. Yet certain types of small business loans may come with more restrictions with regard to how your company can use the funds that it borrows.
You may need to state your loan purpose on your business loan application. If the loan you’re seeking comes with strict usage restrictions, you may want to chat with a loan officer ahead of time to make sure the financing is a good match for your business’s borrowing needs.
Requirement #8: Industry Type
Lenders often have eligibility requirements regarding the types of businesses that are eligible for funding. If your company operates in an industry that a lender considers to be high risk, you likely won’t be eligible for business financing.
Lenders differ when it comes to the types of businesses they prefer to avoid. Yet if your company operates in any of the following industries, you might find it challenging to qualify for certain business loans.
- Gambling
- Firearm Sales
- Adult Entertainment
- Cannabis
It’s not just “high risk” businesses that could face funding challenges in this area. Some lenders may prefer not to issue business loans to non-profit organizations, healthcare providers, auto dealerships, child care centers, and more.
Requirement #9: Business Plan
Nearly 70% of business owners recommend creating a business plan before starting a new business according to a QuickBooks survey. Yet many small business owners skip writing a business plan either because they’re too busy or don’t see the importance.
There are many reasons you might want to write a business plan — and the ability to qualify for certain types of financing is one of them. It’s not uncommon for a business lender to ask for a copy of your business plan when you apply for financing.
If a lender does want to see a copy of your business plan with your loan application, that plan may need to contain any number of the following details.
- Company Overview
- Financial Projections
- Industry Analysis
- Competitive Analysis
- Marketing Strategy
- Etc.
If you’re not sure how to write a business plan, the U.S. Small Business Administration provides free resources that can help you. You can use the guide to build a business plan for the first time, or to update and upgrade your existing business plan.
Documents Needed for a Business Loan
When you apply for a business loan, you may need to submit a variety of documents along with your application. The documents below may help a lender measure your potential risk as a borrower and verify that the information on your application is accurate.
- Business Bank Statements
- Tax Returns (Business and Personal)
- Personal Financial Statements
- Driver’s License of Owner
- Employer Identification Number (EIN)
- Business Licenses
- Incorporation Documents
- Balance Sheet
- Cash Flow Projections
- Business Plan
- Payroll Records
- Proof of Insurance
- Copies of Commercial Leases
How to Qualify and Apply for a Business Loan
Once you gather all of the necessary documents and you believe you’re in a position to satisfy lender requirements, you may be ready to apply for a business loan. The following basic steps can help you navigate this process.
- Build credit. Open business credit file and personal credit can go a long way when you want to apply for a small business loan. Good credit can improve your odds of qualifying for a business loan and might help you to lock in lower interest rates too.
- Shop around. Be sure to review your options before committing to a business loan. Search for lenders that seem like a good match based on loan requirements. Then, compare the interest rates, fees, and other loan terms those lenders have to offer.
- Submit a complete loan application. When you submit your loan application, be sure not to skip over any requested information. Submitting a thorough application and all required documents upfront might improve your odds of getting an approval.
- Respond quickly to follow-up requests. If a lender follows up to request additional information or documentation, make it a point to respond quickly. Dragging out the loan application process could impact your funding timeline and might even disqualify you from getting a business loan altogether.
Bottom Line
Small business owners may be tempted to rush through the research phase (or skip it altogether) when they are ready to apply for new business financing. Yet understanding what lenders are looking for could set you up for a more successful loan application.
CreditStrong for Business is the only 0% interest business credit builder in the nation
