⏰ Estimated read time: 9 minutes
Finding and applying for a small-business loan can be time-consuming. By knowing lenders' typical business loan requirements ahead of time, you can streamline the process and avoid potential frustration.
Here are seven things lenders generally look at to decide whether you qualify for a loan.
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1. Personal and business credit scores
You’ll likely need good personal credit (typically a score of 690 or higher) or excellent business credit to qualify for a government-backed SBA loan or traditional bank small-business loan.
Online lenders, on the other hand, can be more lenient with credit scores, emphasizing your business’s cash flow and track record instead. Some online lenders and nonprofit organizations offer business loans for bad credit and will accept a minimum personal credit score as low as 500.
Personal credit scores indicate your ability to repay personal debts, such as credit cards, car loans and mortgages. Small-business lenders require a personal credit check because they want to see how you manage debt.
NerdWallet’s credit score bands, used for general guidance
FICO scores, commonly used in lending decisions, range from 300 to 850 (the higher, the better). You can get a free credit score on NerdWallet and a free copy of your credit reports at AnnualCreditReport.com.
Fast ways to build your personal credit include disputing any inaccuracies in your report and paying bills on time and in full.
More-established companies will have business credit scores (which generally range from 0 or 1 to 100) with credit bureaus such as Experian, Equifax and Dun & Bradstreet. Steps to building business credit include opening a business bank account, establishing trade lines and keeping public records clean.
2. Annual revenue
Many lenders will only consider businesses that bring in at least a minimum monthly or annual revenue. Lenders look at your revenue to make sure that you have enough cash flow to afford your loan.
How much cash flow you’ll need depends on the individual lender — for example, online lender OnDeck requires $100,000 in annual revenue to qualify for its line of credit, while Bank of America’s minimum is $250,000 for its secured business loans.
If you don’t meet lender requirements for a business loan with low revenue, you’ll likely have to rely on alternative financing options, like invoice factoring.
Debt service coverage ratio
A similar financial metric your lender may consider is your debt service coverage ratio (also known as DSCR). This ratio compares your available operating income to your current debt obligations. To calculate your DSCR, you divide your annual operating income by your total annual debt payments.
For example, if your annual income is $150,000 and your total debt payments are $100,000, your debt service coverage ratio would be 1.5. Generally, lenders want to see a ratio higher than 1, typically a minimum of 1.25, as this indicates that your cash flow is sufficient to cover your debt obligations.
3. Years in business
Lenders use your time in business as a quick measure of success. The longer you’ve been operating, the more likely you are to have money to repay your debts.
To qualify for a business loan from a bank, you’ll typically need to have been in business for at least two years. Similarly, many SBA lenders require you to have at least two years in business. Online business loans tend to have less stringent requirements but still usually require at least six months in business.
➡️ Ready to get funding?
- If you're a newer business, check out our list of the best startup business loans. Businesses with at least three months or more in operation may be able to qualify.
- If you have a lower credit score, compare the best business loans for bad credit. Some of these lenders accept a credit score as low as 500.
4. Business industry and size
Every industry has a different risk level — and some industries, like restaurants and beauty services, can be considered high risk because they’re more likely to have inconsistent revenue.
There are also certain industries that many lenders don’t work with at all. These typically include adult entertainment, drug dispensaries or products, gambling and money service businesses.
Government-backed loans from the U.S. Small Business Administration have specific size and industry criteria, among other unique requirements. If you want to qualify for SBA loans, you’ll need:
- Your business must meet the SBA's definition of a "small" business, which varies by industry.
- You must be a for-profit company.
- You can’t operate in an ineligible industry, like real estate investing, gambling or political lobbying activities.
- You must be current on all government loans with no past defaults — you’ll be disqualified if you’ve been late (you haven’t paid within 90 days of the due date) on a federal student loan or government-backed mortgage, for instance.
5. Business plan and loan proposal
Lenders will want to know how you plan to use the money and see that you have a strong ability to repay. They may require a business plan that explains what your business goals are and how you plan to reach them. Some lenders may also ask for a business loan proposal, which details the purpose of the loan and how you expect to repay it.
These documents should clearly demonstrate that you will have enough cash flow to cover ongoing business expenses and the new loan payments. This can give the lender more confidence in your business, increasing your chances at loan approval. On the other hand, if you’re a new business that doesn’t have existing revenue to show a lender, a thorough business plan can help convince it that you will be successful in the future.
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6. Collateral or personal guarantee
To qualify for a small-business loan, you may have to provide collateral to back the loan. Business collateral is an asset, such as equipment, real estate or inventory, that can be seized and sold by the lender if you can’t make your payments. This is a way lenders can recover their money if your business defaults on the loan.
For example, SBA 7(a) loans above $50,000 typically require collateral plus a personal guarantee from every owner of 20% or more of the business. A business loan personal guarantee requires you to repay the amount owed from your personal assets if the business can’t.
Some lenders offer unsecured business loans, which don’t require physical collateral but will likely still come with a personal guarantee. Lenders may also take out a blanket lien on your business assets — essentially another form of security — giving the lender the right to take business assets (real estate, inventory, equipment) to recoup an unpaid loan.
Each lender has its own rules, so ask questions if you're unsure what's required.
7. Business and financial documentation
Banks and other traditional lenders typically require a wide range of paperwork when you apply for a small-business loan. The financial and legal documents you may need for a small-business loan include:
- Personal and business income tax returns.
- Financial documents, such as profit and loss statements, balance sheets and cash flow statements.
- Personal and business bank statements.
- A photo of your driver’s license.
- Commercial leases.
- Business licenses.
- Articles of incorporation.
- Proof of collateral.
- Business plan.
- Existing debt schedule, if applicable.
- Legal contracts and agreements.
- A resume that shows relevant management or business experience.
- Financial projections if you have a limited operating history.
Online lenders may provide a streamlined application process with minimal documents and faster underwriting.
When I talked to commercial lending experts, they said one of the most common mistakes business owners make when applying for a loan is submitting incorrect or stale items to the lender.
Not only does this mistake slow down the application process, but it can also lead to automatic rejections. If a lender is using automated underwriting and you input incorrect information, it can result in an automatic rejection — even if you’re qualified.
As you’re completing your application, double check that your documentation is accurate and up to date. It can also be helpful to have a business partner, advisor or financial professional look over your application before you submit it.
💬 MORE NERDY PERSPECTIVE
"When I talked to commercial lending experts, they said one of the most common mistakes business owners make when applying for a loan is submitting incorrect or stale items to the lender.
Not only does this mistake slow down the application process, but it can also lead to automatic rejections. If a lender is using automated underwriting and you input incorrect information, it can result in an automatic rejection — even if you’re qualified.
As you’re completing your application, double check that your documentation is accurate and up to date. It can also be helpful to have a business partner, advisor or financial professional look over your application before you submit it."
— Randa Kriss, lead writer covering small business
Frequently Asked Questions
Although business loan requirements vary from lender to lender, you’ll generally need good credit, strong finances and an established business history to qualify for a loan. Traditional lenders typically have the strictest requirements, whereas online lenders are more flexible.
Banks generally require that you have good to excellent credit (score of 690 or higher), strong finances and at least two years in business to qualify for a loan. They’ll likely require collateral and a personal guarantee as well.
You’ll typically need to provide detailed paperwork as part of your application — and some banks will require you to apply in person.
Each lender will have unique documentation requirements, but at the very least, you’ll likely need to provide:
- Business and personal bank statements.
- Business and personal tax returns.
- Financial statements, like balance sheets and income statements.
Traditional lenders typically require more paperwork than online lenders.
Former NerdWallet writer Steve Nicastro contributed to this article.