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7 Small Business Loan Criteria Requirements to Be Aware Of
October 22, 2021
Small Business Loan Criteria

7 Small Business Loan Criteria Requirements to Be Aware Of

When you apply for a small business loan, there’s no guarantee you’ll get approved. Most lenders will require that small business owners meet certain criteria before extending a loan offer. This is particularly true if you choose an SBA loan or traditional bank loan with more rigorous requirements.

By becoming familiar with small business lending criteria, you can increase your chances of approval. In this blog post, we’ll review common small business loan requirements and how they affect the loan application process.

7 Common Small Business Loan Criteria

While every online lender is unique, there are certain small business criteria requirements that most lenders will have. In the sections below, we’ll review the requirements that you’ll likely need to meet in order to secure a term loan or line of credit from a reputable lender.

1. Strong Credit Score

Your credit score is an essential qualification for a small business loan, especially if you’d like to borrow money from a traditional lender.

Depending on your business structure, business lenders may consider your personal credit score, business credit score, or both. These scores will give the lender a good idea of how likely you are to repay the money you borrow. They may also affect the type of interest rate you secure.

Before you submit a loan application, we suggest checking your credit report to determine your score. If your credit isn’t in the best shape, it’s a good idea to improve it before you begin the application process.

2. Time in Business 

Most lenders have a time in business requirement that disqualifies new business owners from securing business financing options. Typically, they require that you’ve been in business for at least two years, but the good news is this two year threshold isn’t set in stone.

If you own a startup or newer business and haven’t been operational for two years, you may still get approved if you prove your value and potential through other parts of your application. You may also have more luck getting approval from an alternative lender.

3. Business Plan

A business plan is a roadmap to your success and can show lenders that you have a solid business model and a plan for strategic growth. If you don’t have a business plan, it’s important to work with a professional copywriter or write one yourself.

Most business plans are lengthy and include a variety of components such as:

  • The mission statement
  • Management team
  • Marketing strategy
  • Target audience outline
  • Historical financial information
  • Cash flow projections
  • Projected revenue and expenses for the next few years.

The primary goal of your business plan is to demonstrate the value of your business. By providing this information, you can increase your chances of getting approved for funding

4. Business Structure

Business loan providers will want to know your entity or how your business is structured. They’ll likely evaluate your application differently if you operate as a sole proprietorship instead of an LLC, partnership, or corporation, for example.

Since an LLC or corporation structure will likely give lenders more protection against financial or legal issues, many are more likely to lend to these types of businesses.

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5. Industry

The industry that your business is in will give lenders insight into how you run your business and what type of potential you have.

While some lenders lend to small businesses in all types of industries, others cater to specific industries. It’s important to note that many lenders don’t extend loan offers to businesses in industries like adult entertainment, fortune telling, drugs, gaming, and gambling.

6. Geographic Location 

While geographic location doesn’t usually play a huge loan in business loan approvals, it can in some circumstances.

If you live in a hurricane zone, for example, a lender may think of you as a risky borrower and be more hesitant to lend you money. Before you apply for a business loan, confirm that your lender doesn’t have geographic limitations.

7. Collateral

If you apply for a secured loan, collateral will be part of the lender’s business loan criteria. You’ll need to provide details about the collateral that you plan to use to secure the loan. Collateral can be assets such as:

  • Real estate
  • Equipment
  • Vehicles
  • Other expensive items

In some cases, the lender may require an appraisal to ensure that your collateral meets their minimum value requirements.

If you don’t feel comfortable risking expensive collateral, you can opt for an unsecured loan instead. However, you may be asked to sign a personal guarantee to confirm that you will provide personal assets in the event you can’t repay your balance.

Important Documents That Business Lenders Require

In addition to meeting the small business lending criteria we mentioned above, lenders will ask you to provide certain documents pertaining to your business. These may include:

  • Employer Identification Number: Also known as your EIN, your employer identification number is a unique code that acts as your business’s social security number. If you’re a corporation, have a multi-member LLC, or hire employees, you probably have an EIN.
  • Business Licenses and Permits: Most business financing lenders want to know that you operate legally and have the appropriate licenses and/or permits. If you work in an industry like construction, you may also need to show your zoning and fire permits.
  • Income Statements: Income statements can show lenders how much cash your business is generating. By providing income statements, you can prove your profitability, which will show the lender that you can repay a loan balance.
  • Bank Statements: Not only do bank statements prove your business income, they can also give business lenders insight on how you use your revenue. Many lenders require at least a few months of bank statements before approving you for a business loan.
  • Balance Sheets: Balance sheets outline your assets or everything you own and your liabilities or everything you owe. Of course, lenders prefer to see more assets than liabilities.
  • Tax Returns: Depending on your business structure, you may need to share your personal tax returns, business tax returns, or both. If you’re a sole proprietor, submitting personal tax returns will usually suffice. However, if you operate as an LLC or corporation, business tax returns will be required because your business will be taxed.

Conclusion: Understand Business Loan Criteria Prior to Applying

If you find a small business lender you like, learn about their business loan criteria. Then, make sure you meet their requirements and gather the relevant documentation.

If you don’t meet the lender’s prerequisites, you should work on improving your business’s finances. Although you may have an immediate financing need, you shouldn’t apply for a funding option that you won’t qualify for.

In some cases, you may qualify for a Small Business Administration (SBA) loan if you can prove that you haven’t been able to secure traditional funding options. To weigh all of your funding options, check out our guide to different loan types.

Fora Financial

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.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].