The Top 10 Business Loan Requirements to Be Aware Of
While the criteria to take out a business loan varies by lender and the type of business loan you’re seeking, there are several requirements that are generally universal.
By familiarizing yourself with small business loan requirements, you can ensure a smooth application process and increase your chances of loan approval. In this blog post, we’ll review the top 10 business loan requirements you should be aware of.
10 Business Loan Requirements to Consider Before Applying:
1. Business Plan
Typically, business lenders require applicants to prove that the funds they’ll receive will be used to improve their operations. Therefore, most of them request a business plan that describes core objectives, funding needs, and projected finances.
You can think of your business plan as a roadmap of the current and future state of your small business. Before you apply for a business line of credit or loan, make sure your business plan is well-written and incorporates key elements, such as:
- Your business’s mission statement: Explain what your business does and how you serve your customer base.
- Market research findings: Business lenders will be impressed if you provide industry data on how investing in certain areas of your business will lead to growth.
- Management team: In some cases, your lender may want information on who owns the business or makes financial decisions.
- Financial projections: If the lender is confident in your financial future, they’ll be more likely to qualify you for a business loan.
2. Time in Business
Business financing lenders will want to know if you own a startup or if your business has been operational for a significant length of time. In many cases, lenders have a time in business requirement, which disqualifies new or inexperienced business owners.
The longer you’ve been in business, the more attractive your loan application will be because they’ll believe you have had success in the long-term.
Keep in mind that while you can get a small business loan if you’ve been in business for less than two years, your funding options will be limited. You may have to turn to an online lender with more flexible requirements.
3. Personal Credit Score
Even though you’re applying for a small business loan, not a personal loan, your personal credit score will be considered. Of course the higher your credit score is, the more likely you are to get approved for financing with favorable rates and terms.
In a perfect world, you’d have a minimum credit score of 600, which will help you qualify for funding. If you’re applying for a loan from a bank or the SBA, your credit score will need to be even higher.
4. Business Credit Score
When applying for additional business financing, your business credit score is just as important as your personal credit score. It shows how well your business has kept up with payments and debt. In addition, factors like your business’s industry, size, and revenue will all play a role in your credit score.
If you own a startup or newer business with no credit history, your personal credit score will be closely considered. Due to this, you should review your credit report prior to applying for a loan. If your credit score is beneath the lender’s requirements, you may have a difficult time securing business financing.
5. Bank Statements and Other Financial Documents
Small business lenders will analyze your bank statements to determine if you can afford to repay a loan amount.
Bank statements may also demonstrate how well you manage the cash that comes in and out of your business. In most cases, you’ll need to share at least four months of business bank statements.
If you opt for a business loan from a traditional bank or SBA loan, additional financial statements will likely be required. These documents may include:
- Balance Sheet
- Profit and Loss Statement
- Accounts Receivable Statement
6. Tax Returns
Your personal and business tax returns can give working capital lenders a good idea of your personal and business finances. Most notably, they’ll help the lender determine if you’ll be able to pay back your loan amount on-time and in-full.
Most likely, you’ll need to disclose your personal tax returns from the past two years, especially if you have a pass through entity like a sole proprietorship or S-corp.
In addition, your business tax returns will be essential if you’re registered as a corporation or an LLC that’s taxed like a corporation. In these situations, the business lender will review your last two years of business tax returns to evaluate your business expenses, revenue, and profit.
7. Use of Funds
Business loans are designed to help businesses pay for a variety of business-related expenses, such as:
- Commercial property
- Expansion projects
Lenders will ask you how to intend to use the funds if you’re approved for a loan. The purpose of your loan will be particularly important if you apply for an equipment loan as it’s less flexible than other loan types and must be used to cover the cost of equipment.
8. Business Loan Amount
For small business owners, the amount you wish to borrow is just as important as the reason you want to take out a loan.
If you need six or seven figures worth of funds, for example, you’ll likely be better off with a traditional bank loan. However, you’ll have to meet stricter requirements in order to get approved for a large loan amount.
If you’d like to take out a smaller loan amount, a loan from an online lender may be a good option. While online lenders usually offer lower borrowing amounts, they also have more lenient requirements.
9. Business Licenses and Permits
As you likely know, you need a business license or permit to operate legally. Business license requirements depend on where you live, so you should’ve be aware of them when you started your business.
When you apply for a business loan, lenders will ask that you meet the requirements of the state and locality you operate in. Licenses and permits help prove your business is a legitimate operation that complies with applicable regulations.
Depending on the business loan you pursue, you may have to secure it by submitting collateral. Examples of collateral include real estate, inventory, and equipment.
Collateral is essentially an asset you own like equipment or property. If you fail to repay your business loan, the lender will repossess the collateral that you submitted. In addition, if you apply for a loan with a collateral requirement, you’ll have to prove that you own the collateral.
If you aren’t comfortable with a collateral requirement, you may be able to secure your loan by signing a personal guarantee. This document will help you improve your chances of getting approved for financing, especially if your business lacks credit history.
Conclusion: Shop Around to Find the Best Business Loan
Business loan application requirements can be a challenge to meet if you own a startup or newer business. The good news is that many business lenders are willing to take a chance on businesses that are less than two years old.
As long as you meet as many requirements as possible and prove that you’ll use the funds to grow your operation, there’s a good chance you’ll get approved.
If you don’t currently meet these loan requirements, consider applying for a business credit card in the mean time. You can use a credit card as incremental financing until you’re able to meet the requirements detailed in this post. Once you qualify, you can apply for a loan and get the additional financing that your business requires!
Editor’s Note: This post was updated for accuracy and comprehensiveness in November 2021.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.