Apply for a loan
When you run a business, you’ll likely need funds beyond your savings to ensure your growth. Whether you need to purchase new equipment or real estate, hire new employees, or launch a new project, a business loan can provide the capital needed to expand your business. It’s important to understand the requirements for business loans and be prepared to obtain the best loan for your business.
What are the requirements for a business loan?
The requirements for business loans can vary depending on the type of loan and type of lender. Traditional loans from banks or credit unions and loans guaranteed by the SBA generally have stricter requirements, while online lenders may offer greater flexibility. However, all lenders typically consider a number of factors, including credit scores, business history, financial status, debt, and more.
Business and Personal Credit Scores
Your credit scores are one of the most important factors in being approved for a loan and receiving a favorable interest rate, as those with low credit scores are considered to present a higher level of risk to the lender. Most lenders evaluate both your personal credit score and your business credit score.
For personal credit scores, your FICO score is generally considered most important. Loans offered by banks or credit unions typically have higher requirements for credit scores, with minimum scores often being 680 or higher. Online lenders are likely to have less stringent credit score requirements.
Business credit scores are offered by the credit agencies Experian, Equifax, and Dun & Bradstreet, and are calculated on a scale from 0 to 100. Business credit scores are determined based on your business’s track record of on-time payments to lenders and suppliers. You can increase your business’s credit score by reliably paying off a business line of credit or other loans.
Your business’s yearly income is a crucial part of your ability to repay a loan. Lenders will want to see that you have strong revenue and healthy cash flow, showing that your business is profitable. You will need to provide financial statements for the past several years. Lenders will evaluate your expenses and income to determine if your business is healthy.
Many lenders have annual revenue requirements to qualify for a loan, such as $50,000 or $100,000 a year. Newer or smaller businesses may not meet these revenue requirements. Businesses with lower annual revenue may still qualify for loans from online lenders or microlenders.
Length of Time in Business
Businesses that have been operating for a longer period of time may find it easier to obtain a loan because they are able to demonstrate a track record of success. Many loans will require your business to have been operating for at least one or two years. However, there are options for newer businesses. Some online lenders will lend to businesses that have been operating for six months or more. Microloans are often available to new businesses as well.
Another factor lenders will consider is the amount of debt your business already has. The ratio of income-to-debt affects your creditworthiness. If your business already has large, outstanding loans, there is a risk that your income will not be sufficient to cover all your payments if you obtain a new loan, which in turn increases the risk to lenders.
Typically, your debt-to-income ratio should be less than 50 percent. Ideally, you should keep the balance on your business credit cards and lines of credit below 10 percent. Lenders will want to see a balance sheet showing your business’s assets, liabilities, and equity.
If the lender requires a personal guarantee for the loan from one of the owners of the business, which is commonly required for small business loans, the lender will also consider the outstanding debt and financial condition of the individual guarantor.
Many loans require collateral—assets that the lender could repossess if the borrower defaults. Loans secured by collateral often have lower interest rates, as being able to seize and resell assets reduces the lender’s risk if the borrower is unable to repay the loan.
Some loans, such as commercial real estate loans or equipment financing, have collateral essentially built in—the new property or equipment serves as collateral. For other loans, you will need to identify assets such as equipment, accounts receivable, inventory, or other property.
Many loans will also require a personal guarantee, which makes you personally liable for repaying the loan if the business is unable to repay. Some loans require a blanket lien on your business property, in which case the lender would be allowed to seize any of your business assets if you default on the loan.
Some industries are considered particularly risky, which means that it could be more difficult to obtain financing if you work in that industry. Businesses in the cannabis, firearms, adult entertainment, or gambling industries may be ineligible for loans with many lenders. Seasonal businesses may also have difficulty obtaining loans. Some lenders may have additional industries that they will not lend to, so you’ll need to check with your lender to ensure that your business is in a qualifying industry.
If you own a newer business or are just starting out, lenders will want to see that you have a strong business plan and goals for using the loan that will help your business grow, giving you a strong ability to repay the loan. You will need to supply information such as financial projections, business goals, a resume, marketing plans, and a plan for repaying the loan. The qualifications of your company’s leaders can have an effect too, as experience in your industry can help your business succeed.
Business plans are particularly important for startups and less established businesses when seeking microloans or other types of financing. Since these businesses do not have an established track record of success, lenders will want to see a detailed plan that assures them that the business is prepared to repay the debt. SBA loans also typically require business plans.
More established, profitable businesses may not need to supply detailed business plans, but financials are always required.
Lenders typically require a number of documents, which may include:
- Business licenses and permits
- Bank statements
- Tax returns (business and personal)
- Balance sheet
- Employer Identification Number
- Commercial lease documents, if you have a lease
- Payroll records
- Articles of incorporation or ownership documents
- Your resume
- Income projections
- Your driver’s license information
- Personal financial statements for loan guarantors, which includes a list of personal assets, liabilities, income, and expenses
Business Loan Requirements by Loan Type
There are a wide variety of business loans available, and specific loans prioritize different requirements. Here are some of the most common types of business loans along with their major requirements.
|Business plan, financial history, personal credit score, business credit score
|Traditional term loan
|Personal credit score, business credit score, in business for at least two years, collateral
|Online term loan
|Revenue, in business for at least one year, credit score
|Business line of credit
|Business credit score, personal credit score, revenue
|Business plan, personal credit score
|Equipment as collateral, personal credit score, in business for at least one year
|Financial strength and payment history of customers, credit score, in business for at least one year
|Merchant cash advance
|Annual sales of at least $50,000, two years of credit card sales history
|Personal business loan
|Personal credit score and personal financial history
|Business plan, personal credit score, business credit score
|Commercial real estate loan
|Net operating income, personal credit score, business credit score, in business for at least one to two years, financial history
There are a number of types of SBA loans available, including 7(a) loans, CDC/504 loans, and microloans. The SBA does not directly lend funds, but it partners with lenders to guarantee up to 85 percent of the loan. This means that lenders may have their own individual requirements. In general, the SBA requires that businesses are:
- For-profit businesses
- Based in the U.S.
- Have owners with equity in the business
- Small businesses (size requirements vary depending on the industry)
- Cannot qualify for loans from commercial lenders
SBA loans have a lengthy application and approval process and require a large amount of documentation. While SBA loans may have very favorable terms, they may not be appropriate for businesses that need to secure funds quickly.
Traditional term loans from banks or credit unions are usually long-term or medium-term loans. These loans typically have high requirements for personal credit scores (often 680 or above). Your business credit score, length of time in business, and financial history are also key requirements. Most bank loans require you to have been in business for at least two years. Available collateral is also important for secured loans.
Online lenders offer short-term loans as well as loans with longer terms. Online lenders generally have more flexible requirements than traditional lenders and may offer loans to newer businesses with lower personal or business credit scores. Some lenders require a personal credit score minimum of 500 or 550, while others will require higher scores. Online lenders also usually have requirements for annual revenue.
Strong credit scores and revenue are critical when applying for a line of credit. Often, a score over 600 is required, but the exact requirement depends on the lender. Many lenders also require you to have been in business under current ownership for a minimum of one to two years. In addition, lenders will also look at available collateral if you are seeking a secured line of credit.
Since many startups don’t have the longer financial history of more established businesses, it can be harder for them to receive a loan. However, they may be able to receive a number of loan options, including SBA loans, microloans, and more.
A strong business plan is the most important part of loan applications for startups, as it can show lenders that you’re prepared to succeed. Your personal credit score and financial history, business bank account statements, and ability to provide collateral are also important. The longer you’ve been in business, the more loan options you are likely to have as a startup.
Equipment financing can be easier to obtain than many other types of loans because the equipment you are purchasing serves as collateral for the loan. Generally, companies are required to have been in business for a minimum of one to two years and have a credit score above 600. Some lenders also have revenue requirements that businesses must meet. Online lenders may accept newer businesses and those with lower credit scores. Equipment financing usually requires a down payment as well.
Invoice financing gives businesses an advance on their unpaid invoices. This type of loan is generally easy to qualify for and lenders will accept lower credit scores and shorter length of time in business. In addition to your credit history, the creditworthiness, financial strength, and payment history of your customers are crucial factors in obtaining invoice financing.
A merchant cash advance gives a business an advance on its future earnings. It is easier to qualify for a merchant cash advance than traditional business loans. Merchant cash advance providers usually require annual sales of at least $50,000 and a history of credit card sales. You may be required to show records of two years of credit card sales.
A personal business loan is a common choice for new and small businesses with limited operating history. Personal business loans are approved based on your personal credit score, financial history, and income. If you have a good credit score and reliable income, you should be able to qualify for this type of loan.
Microloans are loans for smaller amounts—usually less than $50,000—and are targeted toward small businesses. This type of financing is more likely to be available to newer companies with limited time in business or smaller revenue numbers. Although microlenders still consider your credit scores, they generally put less weight on your credit history than other lenders. Providing a strong business plan is a crucial part of qualifying for a microloan.
Commercial real estate loans typically require business and personal credit scores, financial records, bank statements, tax returns, and asset and liability statements for the past three to five years. In addition, it’s common for lenders to require you to have been in business for a certain amount of time. A down payment of 10 to 35 percent of the sale price is also required.
Your annual net operating income (NOI) is a crucial factor in your eligibility for a commercial real estate loan. The NOI is your income minus expenses. To determine your debt service ratio, lenders will divide your NOI by your mortgage amount. If your income is sufficiently greater than your annual loan payments to allow you to comfortably repay the loan, lenders are likely to approve you.
Seeking financing is a common move for small businesses, and the funding provided by loans can be beneficial and necessary to keep the business healthy. It’s important to have a good understanding of loan types and requirements before you apply for loans. With this knowledge, you will be prepared to find a loan that your business qualifies for and provide all the necessary documentation for a smooth approval process.