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Searching for and applying for a small business loan can be time-consuming, and knowing lenders' general business loan requirements up front can help streamline the process and avoid potential frustrations.
Here are seven things lenders typically consider when determining loan eligibility.
To better understand the unique needs of your business, we'll begin by completing a short survey.
Once you find your perfect match, our team will be happy to guide you through the next steps of the process.
1. Personal and business credit scores
To qualify for a government-backed SBA loan or a small business loan from a traditional bank, you'll likely need good personal credit (usually a score of 690 or higher) or excellent business credit. Online lenders, on the other hand, are more lenient when it comes to credit scores, focusing instead on your business' cash flow and track record. Some online lenders and nonprofits offer business loans for people with bad credit and will accept personal credit scores as low as 500.
A personal credit score indicates your ability to repay personal debts such as credit cards, car loans, mortgages, etc. Small business lenders require a personal credit report to see how well you're managing your debts.
NerdWallet Credit Score Bands (Used as General Guidance)
FICO scores, which are often used in lending decisions, range from 300 to 850 (the higher the better). You can get your free credit score from NerdWallet and a free copy of your credit report from AnnualCreditReport.com.
Ways to quickly build personal credit include disputing inaccuracies in your report and paying your bills in full and on time.
More established businesses have a business credit score (usually 0 or a range of 1 to 100) from credit reporting agencies such as Experian, Equifax, and Dun & Bradstreet. Steps to building business credit include opening a business bank account, establishing lines of trade, and keeping a clean public record.
2. Annual Revenue
Many lenders will only consider businesses that bring in at least a minimum monthly or annual revenue. Lenders look at revenue to see if you have enough cash flow to pay your loan.
The amount of cash flow required varies by individual lender: Online lender OnDeck, for example, requires $100,000 in annual revenue to qualify for a line of credit, while Bank of America's minimum secured business loan is $250,000.
Debt Service Ratio
A similar financial metric that lenders may consider is the debt service coverage ratio (also known as DSCR). This ratio compares available operating income to current debt obligations. To calculate DSCR, divide annual operating income by total annual debt payments.
For example, if your annual income is $150,000 and your total debt payments are $100,000, your debt service ratio is 1.5. Lenders generally want a ratio higher than 1, usually at least 1.25, because it shows that your cash flow is sufficient to pay off your debts.
3. Years in business
Lenders use how long you've been in business as a quick measure of your business' success — the longer you've been in business, the more likely you are to have the funds to repay your debts.
To get a business loan from a bank, you usually need to have been in business for at least two years. Online business loans have less stringent requirements, but you still usually need to have been in business for at least six months.
4. Industry and size
Different industries have different risk levels. Some industries, such as restaurants or beauty services, may be considered high risk because of the high probability of volatile revenue.
There are also certain industries that many lenders will not do business with at all. These typically include adult entertainment, drug stores or products, gambling, and financial services.
Government-guaranteed loans from the U.S. Small Business Administration have certain size and industry standards, as well as other unique requirements. To qualify for an SBA loan, you must meet the following requirements: SBA Loan Requirements
It must be a for-profit business.
They cannot operate in ineligible industries, such as real estate investing, gambling, or political lobbying.
You must have no prior defaults and be in good standing on all government loans. For example, if you're late on a federal student loan or a federally backed mortgage (not paying within 90 days of the due date), you'll be ineligible.
5. Business plan and financing proposal
Lenders want to see how you plan to use the money and whether you have the ability to repay it. Lenders may require a business plan that explains your business goals and how you will achieve them. Some lenders may also require a business loan proposal that details what you want to borrow and how you will repay it.
These documents should clearly show that you have enough cash flow to cover ongoing business expenses and new loan payments. This will give lenders more confidence in your business, increasing the chances of loan approval. On the other hand, for new businesses that don't have existing revenue to show lenders, a thorough business plan can help convince lenders that you will be successful in the future.
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6. Collateral or personal guarantees
To qualify for a small business loan, you must provide collateral to back the loan. Business collateral is assets, such as equipment, real estate, or inventory, that a lender can seize and sell if you can't repay. This is a way that lenders can recover their funds if a business can't repay the loan. For example, SBA 7(a) loans over $50,000 typically require personal guarantees from all 20% or more owners of the business in addition to collateral. Personal guarantees on business loans require the business to repay the loan from personal assets if it can't repay. Some lenders offer unsecured business loans, which don't require physical collateral but may have personal guarantees. Lenders can also put a blanket lien on business assets. This is essentially another form of security and gives the lender the right to seize business assets (real estate, inventory, equipment) to recoup outstanding loans.
Each lender has their own rules, so ask questions if you're not sure what's required.
7. Business and Financial Documents
Banks and other traditional lenders typically require a variety of documents when you apply for a small business loan. Financial and legal documents required for a small business loan include:
Personal and business income tax returns.
Financial documents such as income statements, balance sheets, and cash flow statements.
Personal and business bank statements.
Driver's license photo.
Commercial leases.
Business license.
articles of incorporation.
Proof of collateral.
business plan.
Legal Contracts and Agreements.
A resume showing relevant management or business experience.
Financial projections where operating history is limited.
Online lenders may have a streamlined application process with less paperwork and quicker review.
🤓 Geek Tips
When applying for a business loan, it's important to double-check that your documents are accurate and up-to-date. This will not only speed up the funding process, but it will also help prevent an automatic rejection. If the lender uses automated underwriting and you enter incorrect information, you could end up with an automatic rejection, even if you qualify.
Finding the Right Business Loan
Generally, the best business loans are the ones with the lowest interest rates and the most ideal terms. However, other factors, like how long it will take to get funding and your business's eligibility, will also help you decide which option you should choose. NerdWallet encourages you to compare small business loans to find the best fit for your business.
FAQ
How do I qualify for a business loan?
Business loan requirements vary by lender, but generally you need good credit, strong financials, and an established business history to qualify for a loan. Traditional lenders usually impose the strictest requirements, while online lenders are more flexible.
What do banks look for in small business loans?
To qualify for a loan, banks typically require a good to excellent credit score (a score of 690 or above), a strong financial standing, and at least two years of business history. Collateral and personal guarantees may also be required.
You'll usually need to submit detailed documentation as part of your application, and some banks may require you to apply in person.
What documents are required for a business loan?
Each lender has their own document requirements, but you will need to provide at least the following:
Business and personal bank statements.
Business and personal tax returns.
Financial statements such as balance sheets and income statements.
Traditional lenders usually require more documentation than online lenders.
Former NerdWallet writer Steve Nicastro contributed to this article.