If it’s time to expand your business, you’ll need access to working capital to pay for new employees, office space, materials, equipment, marketing, and more. And while most new businesses start with $10,000 or less,1 not every aspiring business owner has the savings to get up and running. This is where business loans come in.
6 Most Important Business Loan Requirements
The recently funded Paycheck Protection Program offers small businesses a way to meet payroll needs with financial aid from the government. This aid is only being provided through the SBA and its authorized lenders. And businesses can receive a loan of up to $10 million to help cover payroll.
To access this loan, you’ll have to complete an application with an authorized lender that consists of a two-page form in addition to required documentation. If you qualify, you’ll be loaned 250% of your average monthly payroll in 2019.
You may also qualify to have the loan forgiven if no employees are compensated above $100,000 and at least 75% of the money goes to paying workers. If you can’t obtain forgiveness, the loan must be repaid in two years at a 0.5% interest rate after six initial months of interest deferment.
If you think your business would benefit, apply at a Paycheck Protection Program authorized lender.
Are you in an area affected by the coronavirus? The U.S. Small Business Administration (SBA) is offering Economic Injury Disaster Loans. If you qualify, you can get up to $2 million and a 3.75% interest rate. You can visit the SBA website or your local SBA office to apply.
We updated this piece to contain more in-depth information about different types of business loans and loan terms. We also defined some relevant terms (like “origination fee”) and answered a few questions about when businesses should consider business credit cards over loans. Finally, we added in a “next steps” section to make our business loan info more digestible and easier to apply.
But like most good things, business loans don’t come easily. Unlike a personal loan, they involve more risk for the lender, resulting in stricter eligibility requirements. While many business owners want to obtain a business loan, they may be unsure if they meet the requirements. It doesn’t help that the internet is flooded with an overwhelming amount of information on small-business loan requirements.
To cut through the noise and help you secure financing for your business, we’ve combed through all the loan application requirements for business loans so you don’t have to.
Once you’ve finished writing a business plan with financial projections and ensured fiscal responsibility, it’s time to get funded. (Remember, success is in the details.)
When considering a borrower, lenders primarily look at six different aspects of the borrower’s profile—and they may set a minimum requirement for each. Baseline small-business loan requirements typically include a good credit rating and an annual income of at least $20,000 (if you’re new in the business, some lenders will go as low as $10,000). However, since exact requirements vary from lender to lender, we’ve reviewed an assortment of lenders who can work around your unique needs.
Business loan requirements
- Credit. When a small-business owner requests funding, lenders almost always check the owner’s personal credit. So having a good personal credit score is essential. Building great credit for the business itself is also very useful when trying to get a good business loan.
- Cash flow and income. Lenders look at the debt-to-income ratio of a business when assessing its risk. The higher a business’s cash flow and income, the better the chances it has of getting a loan.
- Age of business. New businesses often have difficulty getting funding because most lenders only lend to businesses with a track record of at least two years
- Current amount of debt. The other part of the debt-to-income ratio is debt. Businesses and borrowers with too much debt will have difficulty getting new loans.
- Collateral. Lenders view debt backed by things of value as less risky, so collateral-based loans can be easier to get and have lower interest rates.
- Industry. During the loan approval process, lenders assess the risk of your type of business. Some industries are easier to get loans in than others.
Before we dive in, let’s clarify the most common types of loans for small business owners. Here’s our quick-and-dirty guide, but you can get more detail on our ultimate small-business loan page.
- Business lines of credit let you spend up to a certain amount and then only pay interest on the amount you actually spend.
- Equipment loans help you pay not just for heavy equipment but for any physical asset your business needs as part of its daily operations.
- Invoice factoring loans (a.k.a. accounts receivable financing) pay you the amount of your outstanding invoices. No more waiting on clients who are slow to pay up—the lender pays you the invoice amount (minus a fee), and then they collect from your clients so you can get back to business as usual.
- Merchant cash advances trade you a lump sum for a promised percentage of your future sales.
- Peer-to-peer lending is a relatively new platform that lets you borrow a certain amount of money from a group of investors, usually in an online-only format.
- SBA-backed loans are endorsed by the U.S. Small Business Administration, making them generally reliable and low-interest loans.
- Term loans can get you a lump cash sum within 24 hours—with the trade-off of high interest rates.
- Unsecured business loans are loans that don’t require collateral. Most business credit cards and lines of credit are unsecured loans.
- Working capital loans give you the funds to pay for daily operations, pay employees, and deal with temporary drops in profit.
A note about term lengths: short-term loans give you money to spend with the expectation that you’ll pay back the full amount, usually within 18 months (though the term depends on the lender—some loans have a longer term limit, some shorter).
Long-term financing is better for long-term investment in your business; while short-term loans can tide you over during a seasonal dip in sales or help you purchase a crucial piece of equipment, long-term financing solutions offer a larger chunk of cash to grow your business and profits.
For business owners considering a business loan, sky-high interest rates can feel like a punch to the gut. However, the better your credit score, the more likely you’ll get a low rate on a loan. Keep in mind that lenders look at both personal and business credit scores and history. And because most small-business owners don’t have business credit, personal credit is that much more important. In most cases, you’ll need a credit score of at least 600 to acquire a business loan.
Credit score tier information
Credit score tier
FICO credit score
Under the Fair Credit Reporting Act, you are entitled to a free annual credit report from each of the three major credit bureaus: Equifax, Experian, and TransUnion. You can get all three together or space out your credit report requests over time.
Outside of the major credit bureaus, there are a lot of “free” credit reports and scores floating around. But unfortunately, lenders typically don't use these scores when making credit decisions. We recommend getting a personal FICO credit score, which you’ll have to pay for. The FICO scoring system is used by 90% or more of lenders, so this is the credit score that actually matters.
If you have a weak credit score and credit history, don’t sweat it too much. There are several types of bad credit loans for borrowers with less-than-stellar credit scores.
Types of bad credit loans
Lendio requires borrowers to have a credit score of only 550 when applying for loans. It’s important to note that a 550 credit score is considered subprime, so most lenders will likely deny funding. But with Lendio, you can still get matched with lenient lenders.
If you have a solid credit score, we recommend the following funding options:
Minimum credit score needed
Lowest listed interest/factor rate
Main borrower requirement
Get a loan
Merchant cash advances
4 to 6 months of financial history
Invoices from paying customers
12 months of business history
Assessment by a peer lender, not a bank or the lending marketplace
Types of good credit loans
These loans are considered the holy grail of small-business loans thanks to their longer terms, great rates, and lower monthly payments. Particularly, keep an eye out for an SBA lender; loans backed by the U.S. Small Business Administration are easier to qualify for, and they often have low interest rates.
2. Cash flow and income
Cash flow can make or break your business. A steady and healthy stream of cash shows lenders that you’re capable of sustaining the loan payments. It’s essentially a representation of your business’s health. In addition to income, lenders will most likely look at expenses to determine how profitable your business is. If you’re new to business or lack sufficient cash flow, we urge you to explore our five favorite business loans for startups.
If your company routinely deals with invoices, you’ve most likely experienced the headache of delayed payments. These unpaid invoices can have a serious impact on a company’s turnover or cash flow. Fortunately, there’s a valuable financing option for business owners: invoice factoring. Commonly referred to as accounts receivable financing, invoice factoring is a financial transaction where a business sells their unpaid invoices to a third-party lender. So instead of waiting for your customers to pay their invoices, you’ll be provided with extra cash flow to help you achieve your business goals, meet payroll, and pay operating bills on time each month.
3. Age of business
About 20% of businesses fail within their first year.2 So it’s no wonder why most banks and online lenders require a minimum business age from borrowers. In most cases, the minimum business age requirement can range from six months to two years. Keep in mind, however, that lenders look at how long the business bank accounts have been open, not how long the entity has been registered with the government.
Without two years of business history, you probably won’t get approval from traditional lenders and banks. But have no fear—there are a variety of alternative online lenders that have more relaxed approval processes than traditional lenders, which makes them viable options for brand-new businesses or businesses with bad credit.
Age-of-business requirements for certain lenders
4. Current amount of debt
Next up, lenders look at debt-to-income ratio to measure the percentage of your monthly debt payments against your monthly gross income. Most lenders require a debt-to-income ratio of 50% or lower. As you may have guessed, small-business lenders are wary about lending to borrowers who already have other loans. To avoid the slippery slope of debt, create fail-proof payment plans and avoid high interest rates.
In addition to a debt-to-income ratio, lenders will want to see a balance sheet. This is a basic document that summarizes your business’s financial health, which includes assets, liabilities, and equity. Optimally, your total assets should equal the sum of all your liabilities and equity accounts. A balance sheet helps business owners determine if they can spend to grow or if they should reserve cash and save for a rainy day. While it may seem overwhelming, maintaining a balance sheet is a crucial task for every business. Plus, lenders will give your business bonus points if you come prepared with one.
To make your personal profile stronger, keep a low balance on credit cards and lines of credit (usually around 10% per account). A high credit card balance not only hurts your credit score but also impacts your personal financial health. So avoid spending mindlessly and racking up your credit card balance.
When companies lack a financial track record, lenders often require a personal guarantee from business owners. Even if you have an LLC or a C corporation, the lender can pursue you personally if you can’t repay the loan.
It’s important to note that not all debt is equal. Commercial real estate, lines of credit, business acquisition loans, and merchant cash advances all hold different weights with the lender. But if your debt is backed by assets, you’ll get approved more easily, no matter what kind of debt you have.
For a loan approval, lenders may require collateral, such as invoices, equipment, real estate, and businesses. Believe it or not, business car loans can also require collateral. Collateral refers to tangible assets already owned by the business owner. Some lenders may require borrowers to pledge both business and personal assets to secure a business loan. We understand that this isn’t an ideal situation for startups. But we have good news: some business loans don’t require collateral. Certain business loans offer flexible term options and are easy to qualify for.
If you have to get into debt, be smart about it. When you can, use debt to buy income-generating assets. Creating multiple streams of income isn't just a means of survival, but it's also a strategy for building wealth. When you buy an office complex or an existing business with a steady cash flow, your loan could and should pay for itself within a reasonable time frame. And smart management can increase the asset’s income even more.
Business loans that require collateral
Typical loan amount
Typical interest/factor rates
Get a loan
Commercial real estate
Up to 80% of receivables
Up to 1 year
Revolving or 10–25 Years
The type of industry your business falls under can be a deciding factor for many lenders. And in some cases, they may lean away from certain industries that are considered risky. In fact, businesses deemed to be socially undesirable or that have an unsteady cash flow tend to be rejected most.3
If you own a seasonal business, such as a golf course, landscaping company, or ice cream truck, you most likely understand the importance of ample cash flow to sustain your company during the off season. Given the ups and downs of these types of businesses, getting approved for a business loan may prove difficult. Fortunately, there are solid lenders available that are geared more toward seasonal businesses. To accommodate the various needs of small businesses, Kabbage offers industry-specific loans.
Now that you know what most lenders require, what comes next? We recommend taking these steps to help you secure the loan you need.
- Check your credit score using AnnualCreditReport.com.
- Find a loan provider that matches your credit score, annual income, and industry.
- Decide if you’re okay with collateral; if not, look only at unsecured loans.
- Assemble documents like bank statements, balance sheets, tax returns, and your business license.
- Create or polish an existing business plan.
- Calculate your origination fee, or what you’ll spend up front to secure a loan.
Following these steps will help you approach your lender with more confidence—and remove surprises, financial or otherwise, from the equation.
More options: Credit cards vs. small-business loans
Do you need quick, convenient cash? Maybe in the hundreds instead of the thousands? Business credit cards have some of the same perks as personal cards: they give you instant cash to fund smaller projects (though we probably shouldn’t say “cash”—consider it a loan with an earlier repayment date and a potentially higher interest rate). They can also be useful if you want to build your business’s credit score so you can apply for a loan with better terms later on.
Of course, business credit cards have the same drawbacks as personal cards too. The temptation to keep racking up credit card debt can put your business in the red—permanently. Only use a business credit card for charges you can pay off before the next billing cycle, and remember what we said above about debt ratio: a business credit card can up your credit score, but it can also up your debt-to-income ratio.
Consider a business credit card instead of a loan if you need a smaller amount of cash that you can pay off before each credit card bill is due.
Building business credit
Full business funding
Increased debt-to-income ratio
When it comes to qualifying for a business loan, there’s no one-size-fits-all answer. While you might think you need a perfect credit score and high annual income to get the best small-business loan, most lenders take a number of factors into consideration—if you’re lacking in one area, like a low credit score, you may be able to secure a loan through the strength of other areas, like a lower level of existing debt.
And with proper preparation and smart financial decisions, you can increase your chances of quick business loan approval.
Have you had experience applying for a business loan? Sound off in the comments below!
At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.
- QuickBooks, “Did You Know? Most Small Businesses Start with $10,000 Or Less”
- U.S. Small Business Association, “Small Business Facts”
- United Capital Source, “Top 4 Industries that Are Most Likely to be Denied Small Business Loans”