Key takeaways
- Business loan requirements are not the same for every lender
- Annual revenue, credit score and years in business are a few factors that impact loan qualification
- When submitting a loan application, businesses will have to provide certain documents like tax returns and profit and loss statements
Recent data from the Small Business Lending Survey revealed that some lenders have recently loosened up on approvals for new small business loans, though not all. In Q4 of 2023, new small business term loans increased by 5.68 percent compared to Q3. But these loans also decreased by over 5 percent when compared with Q4 of 2022.
What do these numbers mean? Qualifying for a small business loan will depend on which lender and type of loan you’re applying for and whether you meet the business loan requirements.
Although approval for small business loans can be challenging, especially for startups and businesses with bad credit, there are steps you can take to increase your odds of approval and avoid rejection. To help you qualify for a small business loan, we’ve identified eight common requirements for a business loan.
1. Annual revenue requirement
While revenue requirements vary by lenders, most will want to ensure you have appropriate cash flow — after other financial obligations — to handle a new loan. Online lenders often have lower revenue requirements than traditional lenders. For example, many online lenders require an annual revenue of $100,000, and some even go as low as $36,000 to $50,000. Meanwhile, banks typically require an annual revenue of $150,000 to $250,000.
If you can’t meet annual or monthly revenue requirements, you may need to consider alternative lending. These can include merchant cash advances, invoice financing and invoice factoring. They are more expensive, but since they use your accounts receivables as collateral, many do not have a minimum revenue requirement.
Bankrate insight
Most lenders will require you to show your monthly or annual revenue consistently being deposited in a business checking account.
2. Business plan
A business plan is essential to many business loan applications. Lenders will want to understand what your business does, how it makes its money and how it will continue to succeed. Most importantly, a lender will want to know what your plans are for financing.
You can work with a business advisor or a Small Business Development Center (SBDC) to shape your business plan. You should also include the resumes of each owner and how they will contribute to the business’s success.
Your business plan should include the following:
- Executive summary
- Company description
- Market analysis
- Organization and management information
- Service or product line descriptions
- Marketing and sales information
- Funding request
- Financial projections
However, only some lenders require a business plan. Smaller lenders and nontraditional lenders may only need to see proof that you have sufficient revenue and cash flow to handle the loan, no matter how your business plans on using it.
3. Credit score requirement
Many small business lenders check your personal credit score when you apply for a business loan, especially online lenders and those who work with startups, since many small businesses getting their first loan haven’t had time to build business credit. A personal credit score also reflects how a business owner manages money, a good indicator of how they will handle a new business loan.
Banks and credit unions usually require personal credit scores of 670 or higher for business loans. But online lenders offer more flexible criteria, providing options for bad credit business loans to businesses with scores ranging from 550 to 625.
If you’re requesting a particularly large amount, or you’ve been in business for a long time, your business score may matter. Similar to a personal credit score, your business credit score expresses your business’s creditworthiness. Business credit reports may include information on the number of employees, account information, past payment history and amounts owed. The better your business credit score, the more likely your business is to receive a loan and, potentially, at a better interest rate.
You can check your business credit score with the main business credit bureaus. These include:
- Dun & Bradstreet
- Equifax
- Experian
- FICO
4. Personal financial history
Each owner’s personal finances play a role in their ability to qualify for a small business loan, especially if you’re launching a startup. Business lenders often ask to see your personal bank statements and tax returns to ensure you can responsibly manage a small business loan. They also may require a personal guarantee, which makes you and your co-owners (if you have any) personally responsible for paying back any borrowed funds if your business cannot pay.
If you have poor credit, you may not be able to secure a competitive rate on a business loan. Similarly, if you have previously taken on other debt and failed to repay it, it may be more difficult to secure funding. Many lenders won’t approve your loan if you’ve had a bankruptcy in the last few years. In these cases, having a history of recent, on-time payments for a loan will serve as an asset when the lender reviews your application.
5. Years in business requirement
About 52 percent of new businesses survive past five years, so your time in business matters to lenders. If you’ve been open for multiple years, that sends a message of stability. Lenders know if your business fails, you may be unable to repay them, so you may not qualify for a loan with some lenders until you have completed one to two years in business.
There are some exceptions to the rule. Lenders specializing in startup loans often have more lenient business loan requirements, only asking for six months in business. And some specific loan types, like equipment loans, may have no minimum time in business requirements.
6. Industry requirement
Industry also plays into success — and your ability to qualify for a small business loan. Businesses in profitable and stable industries are more likely to appeal to lenders.
Likewise, many lenders have a list of industries they won’t work with, which you can typically find on their website. Gambling, adult entertainment or services and cannabis are frequently ineligible for traditional financing.
7. Loan proposal
For traditional term loans and Small Business Administration loans, a proposal is key. A loan proposal is similar to a business plan and may be included in one. It outlines:
- Why you need the funding
- How you will use the loan
- How you will pay back your loan
- How it will benefit your business
It isn’t a requirement for every type of loan — and not every lender will want to see one. But you should still have one prepared when you are ready to apply.
8. Other debts and obligations
You will need to list your business’s debts and other financial obligations. This includes other loans you may have, business credit cards, regular bills and payroll numbers. A lender will want to confirm you have enough cash flow to manage a new loan payment.
Even if your business is profitable, it doesn’t mean you can handle more debt. A lender will consider your debt-to-asset ratio when you apply. This tells lenders how much of your revenue is paid towards your current debts. The higher the figure, the harder it may be to qualify for a small business loan.
Bankrate insight
Debt-service coverage ratio (DSCR) may be used to compare a company’s cash flow against debts. When a business applies for a loan, lenders use this information to assess risk and determine if the business has the capacity to repay the loan. The ratio varies from lender to lender, but a DSCR of 1.25 or higher is ideal.
Other small business loan requirements
In addition to these eight categories, other documents you may be asked to submit when you apply for a business loan include:
- Profit and loss statements
- Proof of ownership
- Business licenses and registration
- Employee identification number (EIN)
- Balance sheets
- Business insurance
- Payroll records
- Driver’s license or other photo ID
- Commercial lease agreement
Bankrate insight
If you’re considering applying for a secured loan, you’ll need to provide collateral, which acts as security for the lender and increases your chances of loan approval.
The bottom line
Every lender — and loan — has its own requirements that you must meet to get a business loan. While these are the most common business loan requirements, you may be asked for more or less documentation to prove your business can handle a loan.
Prepare the information you will likely be asked to submit ahead of time, then compare lenders to find one that meets your business’s needs.
Frequently asked questions about business loan requirements
How difficult it is to get approved for a small business loan will depend on your business’s credentials and the lender where you’re applying. Many banks have stringent requirements for credit score, time in business and annual revenue. But you can find online lenders that relax requirements, allowing the smallest of businesses with little revenue or low credit to qualify.
Depending on the lender, you could secure a small business loan with a personal credit score of 550, with higher credit scores increasing the likelihood of approval and potentially better interest rates.
The amount you qualify for depends heavily on your current revenue, as well as other financial factors. The lender will use your current accounts receivable and accounts payable to determine how much your business can reasonably handle. To set the loan amount, lenders often want to see a debt-to-income ratio of 36 percent or less, which means that your debt only amounts to 36 percent of your revenue. Lenders may also look at your debt service coverage ratio (DSCR).
