Small Business Loan Requirements: What to Know Before You Apply
Small business owners often need extra funding to cover their business expenses, boost their working capital, or purchase real estate. When it comes to approaching a lender for financing though, many entrepreneurs are unsure what small business loan requirements they need to meet to be approved.
Read on to learn what information and documentation lenders ask for, how eligibility varies across different types of lenders, and how to improve your chances of being approved.
What Do Most Lenders Require for a Business Loan?
Each lender has its own eligibility requirements. But you may be asked to provide some or all of the following depending on which lender you approach.
1. Personal Credit Score and History
Banks and credit unions check your personal credit score as part of their eligibility tests. They only want to approve applicants with a track record of responsible borrowing. They also want to know that you’re likely to meet all of your repayments on time and in full.
In addition to looking at your score, they’ll scour deeper into your report to look for incidences of late payments, defaults, or civil court judgments.
A good payment record and a score of 670 or more should be enough to get approval — depending on your business plan and loan proposal (covered below). There are some lenders, however, who will work with borrowers whose scores are as low as 500.
2. Business Credit Score and History
In addition to your personal credit history, lenders will look at your business credit score.
Experian’s and Dun & Bradstreet’s business credit scores range from 0 to 100. Experian considers a score of 50 to be moderate and a score of 75 or above to be good. With a Dun & Bradstreet score, 80 or higher is considered good (or low risk).
The FICO Small Business Scoring Service uses a zero to 300 scale. If you have a score of 160 or more, that may be enough to secure a business loan.
To calculate your score, FICO uses your business and personal credit scores, length of time in business, revenues, cash flow, and whether any lenders have outstanding liens against your company.
3. Annual Revenue
One eligibility requirement many financial institutions have is annual revenue. This is how much you bring in each year in sales.
For example, a bank might require your company to earn at least $100,000 per year before it will consider a loan approval. Lenders also want to see that your revenue and cash flow are stable, as this means you have a better chance of making your monthly payments.
4. Years in Business
The longer you’ve been in business, the less of a risk you are to a lender. Established companies are preferred because they have a proven track record. Many lenders may require at least one or two years in business before considering your loan application.
If you’re a startup or a new business, you often will have fewer lending options since you don’t yet have a track record and are a higher risk for the lender.
5. Business Size and Industry
Many lenders consider certain types of businesses more risky, such as gambling, financial services, or construction firms. To protect themselves against potential loss, they might impose stricter loan requirements on these firms during the application process. This will often also mean higher interest rates, even if you have good credit.
Businesses in other sectors might be completely ineligible. For example, in the SBA loan program, life insurance, private clubs, nonprofit organizations, and firms with pyramid sale distribution plans cannot apply.
The number of employees in your business may also affect which types of loans you might be eligible for, especially with small business loans. Check out how SBA lenders define what a small business is in your sector with its size requirements document.
6. Business Plan
Some lenders require a business plan as part of their small business loan requirements.
Business plans lay out your mission, who your target market is, which competitors you’re going up against, and how you run your business. They also contain detailed financial forecasts about your cash flow and profit over the coming years.
A well-constructed and researched business plan clearly shows lenders why you need financing, how you intend to use it, and how it will help your business grow.
7. Loan Proposal
The loan proposal is a separate document from your business plan. It focuses on the specifics of how you’ll repay the lender and spend the money.
Lenders use loan proposals to assess how risky your project is and whether the financing option you’re going for will meet your business needs.
8. Legal and Financial Documentation
You may also be required to provide disclosure documents as part of your application.
Financial disclosure documents include balance sheets, profit-and-loss accounts, tax returns, and bank statements for your business. Legal disclosure documents include business registration papers, licenses, and partnership or shareholder agreements.
Lenders need these documents to get a full picture of your business's financial health and legal standing.
9. Existing Debt and Repayment History
If you already have a loan or other debts, you’ll need to tell your lender about them.
They’ll want to make sure that you can meet another repayment obligation without jeopardizing your cash flow. Show them a clear history of any previous facilities you’ve taken out (including refinancing options) so you can demonstrate your stability as a borrower.
10. Down Payment
Many financial institutions ask for a down payment on large loans, especially if you’re using the capital to buy commercial real estate or high-value equipment for your business.
They do this for the same reason mortgage lenders ask you to pay a deposit. It reduces the risk to the lender and shows your own financial commitment to the investment.
11. Collateral
Collateral is a business asset you pledge to the lender to secure the loan.
If you can’t keep up repayments on the loan, your lender can seize the collateral. They then sell it off to try to recoup the outstanding balance on your facility. The value of the collateral you offer must be equal to or more than the size of the loan your business takes out.
12. Personal Guarantee
A personal guarantee means you and any co-owners agree to repay what’s owed if the business can’t. This lowers the lender’s risk because it legally ties you to the debt. While it can help you secure funding if your business credit isn’t very strong yet, it also places your personal assets on the line if things go wrong.
How Small Business Loan Requirements Vary by Lender Type
While some lenders require entrepreneurs to pass most of these requirements, each lender has its own approval procedure.
Traditional Banks and Credit Unions
Traditional banks and credit unions often have the strictest small business loan requirements. They’re likely to require you to pass as many of the above requirements as possible.
You may wait weeks or even months to hear back, especially for larger loan amounts.
If you do your business banking with a bank or credit union and have a checking account with them, you may stand a greater chance of them accepting your proposal.
SBA Loans
The SBA loan program is a joint venture between the U.S. Small Business Administration and private lenders, such as banks or certified development companies.
SBA loans are designed for companies that can’t meet the small business loan requirements of traditional lenders. The reason the same banks and credit unions that turn you down may approve you for an SBA loan is that the SBA guarantees to repay the private lender a portion of the amount borrowed if the business fails.
There are several types of SBA loans available, and each type has different loan requirements:
SBA 7(a) loans: With this option, you can borrow up to $5 million for uses like working capital, machinery and equipment, refinancing existing debt, real estate, or buying an existing business. You must be a for-profit operating business.
SBA Express loans: This is similar to the SBA 7(a) loan but offers a maximum loan amount of $500,000 and has a 36-hour application turnaround time. Also, collateral is not required on loans of up to $50,000.
SBA 504 loans: With an SBA 504, you can borrow up to $5.5 million for an eligible use. For example, the funds can’t be used for working capital or rental real estate. Other SBA 504 loan requirements include having a tangible net worth of less than $15 million and a net income of less than $5 million.
SBA Microloans: Microloans let you borrow up to $50,000 for things like equipment, inventory, or working capital. They are available to startups, new businesses, and non-profit organizations. Each intermediary lender sets its own Microloan requirements, and they often ask for collateral and a personal guarantee.
With larger SBA loans, especially those linked to real estate or expensive equipment, you’ll have to make a down payment and provide collateral. Also, with the exception of SBA Express loans, it may take a few weeks before you get a decision.
You can choose to take out some SBA loans as a business line of credit instead.
Online and Alternative Lenders
Many online and alternative lenders, like Backd, require much less documentation than traditional financial institutions and often have lower minimum credit score requirements. They also have much faster turnaround times and can fund you within as little as a day.
Each firm will have its own range of financing and loan options, many on flexible terms. In addition to standard short-term and long-term loans, they may offer business lines of credit, working capital advances, revenue-based financing, and more.
Instead of submitting bank statements and financial forecasts, some will ask for permission to access your accounting software packages like Sage or Xero to review real-time revenue, expenses, and cash flow trends to assess your ability to repay the loan.
As online and alternative lenders have less stringent small business loan requirements, you may be charged a higher interest rate on any business debt you take out through them.
Get Ready to Submit Your Loan Application
Improve your chances of being accepted by a lender by taking the following steps:
Get your documentation ready: Make sure the financial statements you provide, such as cash flow statements and profit-and-loss accounts, are as up-to-date as possible. Lenders struggle to make decisions based on outdated information.
Settle debts: If you can afford to pay off existing debt without harming your business, do so. While it may not immediately reflect in your credit report, paying off debts a few months before applying could improve your chances of approval.
Keep up to date on payments: Make sure you pay your suppliers, credit card bills, and other financial obligations on time. Late or missed payments can lower your credit score and make lenders less confident in your ability to handle a new loan.
Refine your business plan: Ensure it clearly outlines your goals, strategies, and financial projections to demonstrate to lenders that you have a solid and well-thought-through plan for success and repayment.
Apply for Funding With Backd
The rise of online and alternative lenders has expanded the market for business financing. Entrepreneurs now have more choices than ever when it comes to the types of loans they take out. This competition means that if you don’t meet one lender’s small business loan requirements, you might meet another’s, so your access to capital is not cut off.
If you need capital quickly, traditional banks and credit unions may not be able to service your needs fast enough. Online and alternative lenders like Backd are set up to assess each application quickly and provide funding, sometimes within just one day.
Backd has two financing options available:
Working capital advance: Access between $25,000 and $2 million (minimum one year in business required).
Business line of credit: Borrow between $50,000 and $750,000 (minimum two years in business required).
To be eligible for our lending solutions, you must be based in the U.S., have established business credit already, have a brick-and-mortar address, have a minimum credit score of 625, and have a minimum monthly revenue of $100,000.
Apply now and be funded within as little as 24 hours.
