Understanding Small Business Loan Requirements

1. Credit score. Business owners have two credit scores to monitor — their personal credit score and business credit score. It takes time to build up credit history for your business, so your personal credit score carries more weight in the meantime. Expect lenders to review your personal credit history when considering your loan application. You may want to wait to apply until your credit is in good shape to boost your chances of approval. You can use LendingTree to check your personal credit score for free. You can also request a business credit report from one of the business credit bureaus, such as Dun & Bradstreet.
2. Time in business. Most lenders prefer to work with businesses that have been operational for several months, often requiring at least six months to a year in business; banks may look for two to three years in business. Lending to startups is considered risky, as newer businesses don’t have a proven track record of repaying debt. Before applying for financing, check the lender’s time in business requirements to make sure you meet the minimum.
3. Business plan. Your business plan should encompass all aspects of your business, including a description of your product or service, your expenses and how you generate a profit. Lenders would likely be most interested in the financial portions of your business plan, including financial statements that we’ll discuss below. Still, the business plan as a whole would indicate to lenders that you have strong management skills, an understanding of the marketplace and the ability to pay back a loan.
4. Balance sheet. The business’s assets, liability and owner equity would be illustrated on your balance sheet. Organizing this data in one document would show the business’s financial standing at any given point in time. You would need to deduct your current liabilities from your current assets to show what the company is worth. The balance sheet would help lenders determine how well-resourced the business is and whether it is over-extended financially.
5. Cash flow history and projections. Free cash flow represents the amount of money available to a business after paying standard daily expenses. A cash flow analysis is another tool lenders use to determine a business’s ability to repay debt. Breaking out your cash flow history and projections would show lenders how much debt your business could handle and how much cash would be left over to reinvest in your business.
6. Accounts receivable and accounts payable reports. Accounts receivable is the amount of money customers owe you for completed projects and services. On the other hand, accounts payable is the unpaid amounts that you owe to vendors. The details of how your company processes payments and accounts payable shows a potential lender that you are — or are not — well-organized enough to make effective use of your resources.
7. Collateral. Borrowers can pledge assets to act as collateral to secure a business loan, giving the lender the ability to seize those assets if the business defaults on payments. Not all lenders require collateral, but if they do, the loan amount would depend on the value of the collateral. Acceptable assets could include property, inventory, equipment, invoices or accounts receivable.

Online loan requirements vs. bank loan requirements for business

Online business lenders typically fund loans faster than banks because they usually review fewer documents from applicants. Most prioritize credit score, annual revenue, time in business and profitability. Instead of requesting the reports above, they may ask for bank statements or access to your bank account or accounting software.

However, speed comes at a price — online lenders may have more lenient requirements, but they often charge higher rates and issue smaller loans.

Banks are typically stricter and require many of the documents discussed above. But if you’re approved for a bank loan, you could receive a larger amount with a lower, competitive rate.