August 23, 2021

Business Loan Requirements: Why Is Time in Business Important?

After all, you’d expect someone with years of experience to be less likely than a rookie plumber to make a mistake. On average, this is true, because long time business owners have had more of a proven track record in their perspective industry. Lenders make a similar evaluation of borrowers with their time in business requirements for small business loans. While it varies based on the type of loan, lenders typically have a minimum threshold for the age of a business that they will lend money to. In short, time in business loan requirements help lenders mitigate risk. However, not all business loan lenders or loans have the same time requirements. Plus, if you don’t meet the minimum age threshold, what financing alternatives do you have? In this blog post, we’ll answer these questions about applying for a business loan, and further explain why small business owners are usually required to meet a time in business requirement in order to secure funding.

Why Is Time in Business a Loan Eligibility Requirement?

20 percent of businesses fail within their first year of operation. When a business fails, lenders have to go to great lengths and expense to recoup their losses. When that happens, business financing lenders lose a lot of money. By instituting a time in business requirement, lenders avoid working with companies that haven’t proven they can last at least one year. Additionally, new business owners typically aren’t as experienced at financing their business. Compared to veteran entrepreneurs, new owners tend not to know how best to use their loan. Nor do they necessarily know how large of a loan they need. Also, new entrepreneurs are less likely to have built up a strong credit history. To ensure that your business and personal credit scores are good, business lenders may want to wait for a certain length of time to pass before providing you with a loan.

Are There Different Requirements for Different Business Financing Lenders and Loans?

When you’re trying to qualify for a business loan, keep in mind that loan eligibility requirements can vary widely. Especially when it comes to alternative lenders, such as an online lender, versus a traditional lender, like a bank or credit union. For example, to approve your business loan application, banks and credit unions will generally require your business to be at least two years old. However, an online lender may only require your business to have one year in operation to approve your application. Business age requirements also depend on the type of loan. Term loans typically have high minimum ages. However, lines of credit, equipment financing, and invoice factoring have much lower minimum ages. In fact, you can get a business credit card with only a few days in business.

3 Ways to Make Sure You Meet Time in Business Requirements

You might think all you have to do is wait to meet your time in business requirements, but that’s not the case. Here are three ways you can ensure that business financing lenders properly count the age of your business.

1. Obtain an EIN, and keep it

Many entrepreneurs start their business as a sole proprietorship then incorporate later. If you’re not careful, though, that can lead to your time in business clock starting over, making it more difficult to secure funding. A good way to avoid this is to obtain an employer identification number (EIN) and transfer it if you create a new business entity. By obtaining an EIN, you’ll ensure that you don’t reset your clock, making it more likely you'll get approved for a loan.

2. Open a business bank account

When establishing the age of your business, you need a paper trail. In addition to obtaining an EIN, opening a business bank account is a great way to document your business’s age. In fact, even if you haven’t incorporated your business, a business bank account can establish your time in business. Typically, most business lenders will require that your business have a business bank account in order to supply you with a business loan. Therefore, opening a business bank account will help you meet numerous loan application requirements.

3. Start your official business now

If you haven’t yet started your small business, we suggest making it official as soon as possible. Even if you only plan to run your business as a side hustle to start, establishing the business will start your time in business clock. When it comes time to obtain business financing, you’ll be glad you did. Another way to legitimize your business is to create a thorough business plan. This will help you identify cash flow shortages and other issues, so that you can communicate exactly how you'll use your loan. New call-to-action

Conclusion: If You Don't Qualify, Here's How to Finance Your Business in the Meantime

If you don’t meet the age requirement for a term loan, there are still business financing alternatives that you could pursue. As we mentioned earlier, other financing options have lower age thresholds. Here are their typical age thresholds: 
  • Business credit cards: one or more days
  • Equipment financing: six to twelve months
  • Invoice financing: three or more months
  • Credit lines: six to twelve months
  • Merchant cash advance: six or more months
Of course, each of these alternative financing options has significant differences from a term loan. Therefore, while these funding options can help while you wait, they’re not a one-to-one replacement for a term loan. Before selecting a long term funding product, you should take time to evaluate your business's needs. If you’re interested in any of these alternative financing options, read our posts explaining their pros and cons before making any decisions: