Business Loan Requirements: 8 Things You Need to Qualify
To get a business loan, both you and your business will need to meet certain requirements. Business loan requirements vary significantly between lenders.
While traditional lenders tend to offer the best rates and terms, they also have the strictest requirements. Alternative lenders may be more lenient, but you’ll pay a price for this flexibility — often in the form of higher rates and shorter terms. Though requirements vary, here’s what you’ll typically need to qualify for a business loan.
1. Basic business and personal information
To get a small business loan, you’ll need to share some basic information about your business and its owners. This includes the full name, date of birth and Social Security number of any individual who owns at least 20% of the company. You’ll also need to provide your business’ name, address and Employer Identification Number (EIN).
Learn more about required loan documents and information.
2. A credit score of at least 500
Depending on the age of your business, lenders may consider both your personal and business credit scores to qualify you for financing. But if your business is relatively new, your personal score is likely to have the biggest impact on your potential loan.
Some online lenders are willing to lend to bad credit borrowers with scores as low as 500, but these loans often come with high interest rates and may require daily or weekly repayments. To get the best rates and the most flexible terms, you’ll typically need a personal FICO Score of 670 or higher.
You can monitor your credit score for free with LendingTree Spring. It’s also a good idea to pull a copy of your credit report before applying so you can make sure it’s accurate – and dispute any errors if it’s not.
3. Up to two years of business history
Lenders want to work with small businesses they can trust to repay their debts. For this reason, you’ll be in a stronger position to borrow if you can demonstrate your business’ success over several years.
Many lenders require a minimum time in business of two years or more, though businesses that have been in operation for less than this amount of time may be able to qualify for a startup business loan. Still, even startup loans typically require a three- to six-month business history. Before you apply for a business loan, look for minimum time-in-business requirements on the lender’s website. You can also find this information by reading lender reviews.
4. Proof of revenue
While being in business for a few years may make it easier to qualify for a business loan, you’ll also need to prove that your business is generating enough cash flow to cover your loan payments.
Lenders set minimum annual revenue requirements that can range from as little as $30,000 to as much as $250,000 or higher. To prove your business revenue, you’ll need to provide documents like bank statements, tax returns and a cash flow analysis.
5. Some form of security
Depending on your credit score, business age and revenue, lenders may require some form of collateral to secure your loan. Collateral is typically any asset your lender can seize if you fail to repay your loan.
Common forms of collateral include assets like equipment and real estate, though some lenders prefer to use a blanket lien — this gives them a claim on any and all business assets. Others may require a personal guarantee, which makes small business owners personally responsible for their company’s debt. Most lenders will also want proof that no previous lenders have a lien on the collateral you’re using for the loan.
But whether the lender seeks specific collateral, a blanket lien or a guarantee, some form of added security will likely be required if your business is seen as high risk due to low credit or a lack of financial stability. Providing collateral can also make it easier to qualify for more favorable rates and terms — just be careful not to bite off more than you can chew or you could run the risk of losing your personal and business assets.
6. A competitive business plan
Applying for a business loan or line of credit often goes beyond sharing basic information about your company. You’ll also need to demonstrate the worthiness of your business concept, prove that you understand your competitors and explain how additional funding will help you reach your goals. To do so, you’ll need a business plan.
Most business plans follow a similar structure. You can find templates online from multiple resources, including the Small Business Administration (SBA) website. In general, your business plan should include:
- An executive summary introducing readers to your business
- A market analysis of your audience and primary competitors
- A detailed breakdown of your products or services
- Insight into the marketing and sales strategies you plan to implement
- Financial projections forecasting your business growth over the coming months and years
7. A plan for how much money you need – and what it’s for
Your business plan or loan application should also include a funding request detailing how much you need and what you’ll use it for. To determine the amount of money you’re looking to borrow, you’ll need to consider several factors, including the types of expenses you’re looking to cover and the amount of debt you’re able to repay.
Understanding your needs will also make it easier to decide which loan programs you want to apply for. Different types of loans have different intended uses, so the best loan and lender for you will depend on how you plan to use your funds. For example, if you need to purchase equipment, equipment financing may be the obvious choice — but if you’re looking for a lump sum of cash to put toward multiple expenses, a term loan might be a better fit.
To determine if your business can realistically repay the loan you’re requesting, lenders will examine your debt-service coverage ratio (DSCR), which measures your company’s ability to repay its debts.
To calculate your DSCR, divide your annual business income (minus operating expenses other than interest and taxes) by your annual debt obligations. A higher DSCR score tells lenders that you can handle your debt payments, while a lower score indicates a higher lending risk.
8. Financial documents to prove you can repay the loan
While your Social Security number and EIN will help prove some of the information we’ve covered, you’ll also need to provide financial documents with your business loan application. The specific documents required will depend on the lender, but in general, you should be prepared to provide the following:
- Copies of your driver’s license and/or Social Security card
- Proof of legal residency, like a utility bill with your name and current address
- Personal financial statements for you and any business partners who own more than 20% of the company
- Your commercial lease or purchase agreement
- Business and personal tax returns from the past three years
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Financial statements, including:
- Income statements
- Cash flow analyses
- Balance sheets
- Profit and loss statements
- A debt schedule
- A copy of your business budget
- Information on your accounts receivable and accounts payable
- Financial projections
- Credit card processing statements
- Copies of your Articles of Incorporation, Bylaws or Operating Agreement
- Copies of your business licenses and permits
- Copies of your business plan
- Information on your collateral, such as a valuation of real estate or equipment
Frequently asked questions
Business loan requirements vary significantly between lenders. While you may not have to meet every requirement on this list with every lender, you will need to meet your lender’s minimum criteria to be approved for a loan.
This typically includes credit, time in business and annual revenue requirements — however, the specific minimums for each of these items will depend on the lender you choose.
Depending on why your loan application was denied, there may be several options available to you. If you failed to meet the minimum requirements with one lender, do some research to see if you can find a different lender that’s less strict about eligibility.
As an alternative, it may also be a good idea to spend some time working on your personal and business finances to put yourself in a better position to borrow in the future. Focus on paying down business debts, increasing business revenue and establishing a solid business history.
It’s possible to get a business loan as a new business, though startup loans often come with higher fees and shorter repayment terms than traditional business loans.
Having a high credit score, a steady stream of business revenue and/or collateral to secure the loan may make it easier for startups to qualify for competitive rates and terms.
Compare business loan offers
- 1. Basic business and personal information
- 2. A credit score of at least 500
- 3. Up to two years of business history
- 4. Proof of revenue
- 5. Some form of security
- 6. A competitive business plan
- 7. A plan for how much money you need – and what it’s for
- 8. Financial documents to prove you can repay the loan
- Frequently asked questions
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