Business loan requirements and applications are not standardized. However, lenders tend to look at certain metrics when deciding if your business is performing well enough to receive a business loan.
Business loans tend to have a low approval rate. Big banks only approved 14.2 percent of small business loan requests in February 2023, according to Biz2Credit. But you may help your odds by knowing what you will need to submit.
To help you know how to qualify for a business loan, we’ve identified eight common requirements for a business loan.
1. Annual revenue
Loans from both banks and online lenders often come with set annual or monthly revenue requirements that your business needs to meet. These vary by lender, but in general, most will want to ensure you have appropriate cash flow — after other financial obligations — to handle a new loan.
For example, OnDeck has a minimum annual revenue requirement of $100,000. But its average borrower has an annual revenue of $300,000 or more. Online lenders may set lower revenue requirements than traditional ones, but this isn’t always the case.
You may need to consider alternative lending if you do not meet the annual or monthly revenue requirement. These can include merchant cash advances, invoice financing and invoice factoring. They are more expensive, but since they use your accounts receivables as collateral, many do not have a minimum revenue requirement.
2. Business plan
A business plan is essential to many business loan applications. Lenders will want to understand what your business does, how it makes its money and how it will continue to succeed. Most importantly, a lender will want to know what your plans are for financing.
You can work with a business advisor or a Small Business Development Center (SBDC) to shape your business plan. You should also include the resumes of each owner and how they will contribute to the business’s success.
Your business plan should include the following:
- Executive summary
- Company description
- Market analysis
- Organization and management information
- Service or product line descriptions
- Marketing and sales information
- Funding request
- Financial projections
However, only some lenders require a business plan. Smaller lenders and nontraditional lenders may only need to see proof that you have sufficient revenue and cash flow to handle the loan, no matter how your business plans on using it.
3. Business credit score
Similar to a personal credit score, your business credit score expresses your business’s creditworthiness. The higher the score, the more likely your business is to receive a loan and, potentially, at a better interest rate. Business credit reports may include information on the number of employees, account information, past payment history and amounts owed.
Not every lender will need you to have an established business credit score. Many small business lenders — especially online lenders and those that work with startups — are more concerned with your personal credit score. But if you’re working with a traditional lender or requesting a particularly large amount, your business score may matter.
You can check your score with the main business credit bureaus. These include
- Dun & Bradstreet
If you have previously taken on other debt and failed to repay it, it may be more difficult to secure funding. But a history of on-time payment for your debt obligations will be an asset when your lender is reviewing your application.
4. Personal financial history
Each owner’s personal finances play a role in their ability to get business financing, especially if you’re launching a startup. Business lenders frequently require a personal guarantee, which makes you and your co-owners (if you have any) personally responsible for paying back any borrowed funds if your business cannot pay.
Because of this, lenders often check your personal credit score. If you have poor credit, you may not be able to secure a competitive rate on a business loan. Many lenders won’t approve your loan if you’ve had a bankruptcy in the last few years.
Credit score requirements vary not only by the type of loan you’re seeking but also by the type of lending institution.
Banks and credit unions may require scores in the upper 600s or even higher. Online lenders’ requirements typically start in the mid-500s or low 600s.
5. Years in business
Your time in business matters to lenders — if you’ve been open for multiple years, that sends a message of stability. Nearly 20 percent of small businesses fail in their first year. Lenders know if your business fails, you may be unable to repay them, so you may not qualify for a loan with some lenders until you have completed one to two years in business.
There are some exceptions to the rule. Some lenders specialize in loans for startups. Alternative funding options may have less strict requirements for how long you’ve been open. Still, you will rarely find options offering funding to businesses under six months old. In this case, it may be better to cover your initial business expenses with your savings or investments from friends and family.
Industry also plays into success — and your ability to qualify for a loan. Businesses in profitable and stable industries are more likely to appeal to lenders.
Likewise, many lenders have a list of industries they won’t work with, which you can typically find on their website. Gambling, adult entertainment or services and cannabis are frequently ineligible for traditional financing.
7. Loan proposal
For traditional term loans and Small Business Administration loans, a proposal is key. A loan proposal is similar to a business plan and may be included in one. It outlines:
- Why you need the funding
- How you will use the loan
- How you will pay back your loan
- How it will benefit your business
It isn’t a requirement for every type of loan — and not every lender will want to see one. But you should still have one prepared when you are ready to apply.
8. Other debts and obligations
You will need to list your business’s debts and other financial obligations for your lender. This includes other loans you may have, business credit cards, regular bills and payroll numbers. A lender will want to confirm you have enough cash flow to manage a new loan payment.
Even if your business is profitable, it doesn’t mean you can handle more debt. A lender will consider your debt-to-asset ratio when you apply. This tells lenders how much of your revenue is paid towards your current debts. The higher the figure, the harder it may be to qualify for a business loan.
The bottom line
Every lender — and loan — has its own requirements. While these are the most common requirements, you may be asked for more or less documentation to prove your business can handle a loan.
Prepare the information you will likely be asked to submit ahead of time, then compare lenders to find one that meets your business’s needs.