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Business loan requirements — explained
5+ things to add to your checklist when applying for financing.
The most important criteria for business lenders typically include revenue, time in business, your credit score and industry type — but it can vary. The higher the loan amount or the lower the rates, the more requirements you’ll need to meet.
Personal credit score
The personal credit scores of you and any other owners or stakeholders of your business can play a big role in the funding you qualify for. Lenders want to see that you’re responsible with funds — largely because it translates directly to how well your business will be able to repay a loan.
But the minimum personal credit requirement for a business loan varies from lender to lender. In general, you’ll have more options with good credit — typically 670 or higher.
Financial and legal documents
Having the right paperwork ready will make the application process smoother and show your lender that you’re prepared. These are some of the most common documents lenders require:
- Business and personal bank statements
- Business and personal tax returns
- Profit and loss statements and balance sheets
- Collateral documents
- Personal financial statement
- Government-issued ID and business registration
- Business plan and financial projections
Annual revenue
Lenders generally look for businesses that make at least $100,000 annually or have an income greater than 1.25 times normal operating expenses. In addition, the amount of debt you and your business carries may also play a role. If your personal or business debt-to-income ratio is too high, you may not be approved for a loan — even if your business otherwise meets annual revenue requirements.
Time in business
Startups and businesses that haven’t begun operations will find it harder to get a loan. Online lenders may accept businesses as young as one year old, but banks and other larger lenders will want to see at least two years in business before considering you for a loan.
Collateral
While not every loan is secured, many lenders require your business to have a deposit that covers 10% to 20% of the expense you want to pay for. You may also be required to sign a personal guarantee that holds you accountable if your business is unable to pay its debts.
Eligible industry
Most lenders set restrictions on the industries it will work with. For example, businesses involved in selling or producing “adult” content or cannabis may struggle to find funding. But it isn’t limited to just these two — check with the lender you’re interested in before applying.
How to qualify for an SBA coronavirus loan
The Small Business Administration (SBA) is offering two types of low-interest loans to businesses affected by the coronavirus outbreak:
SBA Paycheck Protection Program requirements
Government-backed loans up to $10 million to businesses affected by the coronavirus outbreak. The deadline to apply has been extended to August 8, 2020. There’s one main requirements to qualify:
- Right type of business. Your business must be a qualifying small business, nonprofit, sole proprietorship or franchise that meets SBA size standards for your industry.
SBA disaster loan requirements
Disaster loans of up to $2 million to businesses affected by the coronavirus outbreak. There are two main requirements to qualify:
- Right type of business. Your business must qualify as a small business according to SBA size standards.
- Disaster area. The SBA has opened up this requirement to include all states, Washington D.C. and US territories. Visit the SBA website to find out if your area is eligible for a disaster loan.
Does the SBA consider my credit score?
The SBA doesn’t disclose any credit requirements for its disaster loan program. Generally, it’s more important to show that your business has been affected by the coronavirus outbreak than demonstrate good credit.
You can learn more about your eligibility by calling 800-659-2955 (TTY 800-877-8339) or sending an email to disastercustomerservice@sba.gov.
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How to get a business loan in 6 steps
Following these steps can help ensure you get approved for a good deal on a business loan when you apply.
Step 1: Determine what you need
Go into your comparison armed with specific details about the loan you want to borrow, including:
- What you need to fund. You’ll need to tell your lenders what the funds are for — even if you’re just covering general operating expenses.
- How much you need to borrow. Lenders prefer to see an exact loan amount on the application — it shows that you aren’t borrowing too much or too little for a project.
- The type of funding you need. Are you looking to fund a one-time expense, or do you need access to a line of credit? Knowing this can help you choose a lender.
- When you need the funding. If it’s an emergency, stay away from banks, credit unions and SBA loans — they can take weeks or even months to fund.
Step 2: Compare lenders
Use the information you gathered in the first step and look for a lender. Compare factors like interest rates, fees, loan terms and how often you need to make repayments. You might have to call the lender to get this information since many lenders don’t provide it online.
And check out customer reviews to look out for common business loan red flags.
Step 3: Prequalify
After you narrow down your choices, fill out a prequalification application with your top picks, if possible. This gives you a more personalized idea of what your business will get, though it’s not a guaranteed offer.
If you don’t have the option to prequalify, consider calling the lender and speaking to a representative — they can often give you a ballpark of rates and terms your business might qualify for.
Step 4: Fill out the application
Follow the lender’s instructions to fill out the application. Many allow you to get started online, but often you’ll need to speak with a representative before you can fully complete it. You may also be required to visit a branch or hold a business bank account with the lender — which can further limit your loan options.
Double-check your answers to make sure there are no inconsistencies. Mistakes are one of the top reasons loan applications get rejected.
Step 5: Submit your documents
After you submit your application, lenders typically ask you to submit documents to verify the information you provided. If you’re applying online, you can often upload PDFs of any verification documents. You also often have the option to fax or mail in copies of your documents if you can’t submit them in person.
Step 6: Review the terms and conditions
If approved, look over your loan documents and read the lender’s terms. These should detail your repayment schedule and the total amount your business will need to repay.
I want an SBA loan. Do I need anything else to apply?
The Small Business Administration backs loans to help small businesses qualify for low rates and large amounts of funds. But since it involves taxpayer money, these come with tighter requirements than your typical business lender.
At a minimum, your business must meet the following criteria:
- For-profit business
- Meet specific SBA size standards
- Exhausted all other financial resources
- Eligible type of business
- Operate in the US or territories
Bottom line
Your credit score, revenue, time in business and industry are generally the most important requirements when applying for a business loan. But it can vary depending on the lender. Explore your options by checking out our guide to business financing before you get started.
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