What Are the Requirements to Get a Business Loan?

A small business loan is a form of financing that provides a capital infusion to a business, often to fund an expansion or smooth out short-term cash flow problems.

There are various types of loans for businesses, such as business term loans and startup loans. Some of the financing tools for businesses can be used for general purposes, as in the case of business credit cards, while others can only be used for carefully defined purposes, as in the case of equipment loans.

Business loans are often disbursed by traditional banks, and if you have a more established business with a healthy cash flow, this may be your best option. There are also several alternative solutions, including online lenders, which may cater to businesses that do not meet the criteria for traditional loans.

Regardless of which loan may be right for your situation, the first step will be to familiarize yourself with the eligibility requirements and the steps you need to take to get approved.

What do you need to get approved for a business loan application?

Business loan requirements are the criteria you need to meet in order to qualify for these products. If you’re considering a loan for your small business, you should familiarize yourself with the qualifications you will have to fulfill and the steps you will need to take to get approved for financing.

Credit

Lenders typically check your business’s credit score to determine your eligibility. Unlike personal credit scores, which range from 300 to 850, a business credit score runs from 1 to 100. You should aim for a score between 80 and 100 to get the best rates.

Many lenders will also look at your personal credit score before coming to a decision — especially if you have a small business, sole proprietorship or startup. (You should have a credit score of at least 630 to 650 to increase your odds of being approved for financing.)

Revenue

Lenders prefer to do business with profitable companies that have enough cash to meet their loan obligations. Even if a company generates high revenue, low or negative profit margins can make it challenging for them to service their debts.

It’s common for lenders to require businesses to demonstrate a minimum annual revenue to qualify for a loan. However, specific requirements and thresholds vary between lenders and loan types.

An established business

Data collected by the U.S. Small Business Administration shows that only about half of all small businesses survive for longer than five years. The same data shows that more than 30% of small businesses fail within two years. In light of these statistics, it should be no surprise that lenders prefer to work with established businesses.

Businesses in the early start-up phase are usually riskier than more mature businesses because they’re more likely to default on their debt obligations. If your business has operated for less than six months to two years, you may have a hard time securing funding with a loan. However, time-in-business requirements vary by lender, and alternative lenders generally have more flexible eligibility criteria.

Even if your business is established enough to qualify for loans, you may not qualify for the most competitive rates. Older businesses typically receive more favorable terms, such as lower interest rates and higher credit limits, than younger businesses.

Personal guarantee

When providing a loan to a small business, most lenders require a personal guarantee from any partner in the business who owns at least 20% of the company. This is a commitment to repay debts if the business falters and it means the individual’s assets are potentially at risk in a worst case scenario.

A business plan

Lenders want to know what your business does and how you plan to reach your goals, which is why you’ll typically be required to submit a business plan in the loan application process. This document will include details about your strategy and an analysis of the opportunity for your business. A business plan generally lays out details about operational needs as well as data and projections related to revenue and costs.

Collateral

If you’re applying for a secured business loan, you’ll need to put up collateral, such as equipment, inventory or real estate, to protect the lender. If you stop making payments on the loan, your collateral could be seized to cover your debts.

What are your options if you have bad or no credit?

Securing a business loan will be more difficult if you have bad or no credit. However, it's not an impossible feat. These are some of the options if you have bad or no credit:

• Net 30 accounts: Net 30 accounts are a common entry point for businesses with no credit history. Certain vendors offer a 30-day, interest-free loan on business purchases. Oftentimes, these vendors will report your payment history to the major business credit bureaus, allowing you to build up a credit score for your business so you can access other forms of financing in the future.
• Invoice factoring: Invoice factoring allows you to sell your business’s unpaid invoices to a third party which then collects payment. Because the invoice factoring company personally collects from the client, it will focus on the client’s creditworthiness and not yours. Invoice factoring can give you quick access to funds, but it has the potential to damage client relationships, and it will not build your credit score.
• Secured loans: Collateralized loans secure your loan with some form of collateral. We’ll cover this in more depth in the next section, but it's worth noting that many lenders have more relaxed credit score requirements for this loan type.
• Alternative lenders: Large, well-established traditional lenders like Citigroup and Bank of America typically have more stringent lending requirements. Alternative lenders, on the other hand, cater to businesses that can't qualify for traditional loans. They typically have more flexible terms and lending requirements, which can be beneficial for businesses in their earlier stages. In return, these lenders may charge higher interest rates and fees.

What documents are required to get a business loan?

When you apply for a business loan, your lender will require certain documents to verify your identity and assess your business's financial health. While specific requirements may vary by lender and loan type, most will ask for similar documents.

Here are some of the documents most commonly required for a business loan:

• Any applicable business licenses
• Commercial leases
• Balance sheet
• Driver’s license or another form of personal ID
• Articles of incorporation
• Third-party contracts
• Business plan
• Cash flow estimate and budget
• Bank statements
• Tax returns
• Credit reports
• Financial history statements
• Income statement

What is the difference between a secured and unsecured business loan?

The main difference between a secured business loan and an unsecured business loan is that secured loans are backed by collateral and unsecured loans are not. If you default on a secured loan, the lender will take possession of the listed collateral. Collateral can come in many forms including:

• Heavy equipment
• Vehicles
• Real estate
• Unpaid Invoices

Some loan types are built with a specific form of collateral in mind. For example, lenders usually have more lenient policies for equipment loans, which are secured by the equipment being financed.

Unsecured loans are not backed by specific collateral. However, that doesn’t mean lenders can’t go after you for any unpaid loan balances. When you sign a personal guarantee, you give lenders the right to pursue you personally for the unpaid loan balance if your business defaults on payments, even if your business is organized as an LLC.