Business Loan Requirements: What You Need to Get a Business Loan

For many small business owners, business financing can be critical — a means to fund growth, cover operating expenses or manage unexpected challenges. However, navigating the business loan application process can feel overwhelming, especially if you’re unfamiliar with the requirements.

Lenders assess several factors before approving a loan, from credit scores to business history. Understanding these requirements will not only improve your chances of approval, but also help you secure the best possible terms.

In this guide, we’ll cover the essentials of applying for a business loan, the importance of credit scores, ways to improve your eligibility and common pitfalls to avoid.

What’s required to apply for a small business loan?

Business loan requirements vary depending on the lender and type of loan. However, most lenders assess the following key factors. Preparing for these in advance can streamline your application process.

Personal and Business Credit Scores

Your credit scores — both personal and business — play a crucial role in the loan approval process. Credit score requirements can differ greatly between banks and online lenders, but here’s what lenders typically expect:

Personal credit scores. Personal credit scores show your ability to manage individual finances. It can be viewed as a safety net, especially if your business is new or lacks much credit history. A minimum of 600 is often required for basic loan products, though good credit scores can lead to better terms.

Business credit scores. Business credit scores demonstrate your company’s financial reliability. If your business has a credit score, small business lenders prefer a Paydex score of 75 or higher. This indicates that your company consistently pays bills on time.

Annual Revenue

Lenders assess your business’s annual revenue to gauge its capacity to repay the loan. The exact threshold varies, but many lenders expect a minimum of $100,000 to $250,000 annually. Businesses with strong and consistent revenue are more likely to secure favorable loan terms.

Time in Business

The length of time your business has been operating is another critical factor. Lenders view established businesses as less risky. While many lenders require a minimum of two years in business, some alternative lenders or programs cater to startups and new businesses. In those cases, strong personal credit and a solid business plan can offset a limited operating history.

Business Industry and Size

Your industry and the size of your business can influence your loan eligibility. Certain sectors, like retail, restaurants or construction, may be considered riskier due to economic fluctuations. Additionally, small or niche businesses may face stricter qualifying requirements, particularly for large loans. Other industries such as gambling or adult entertainment may be ineligible to receive funding altogether. Understanding your lender’s appetite for risk within your industry can help you target the right financing options.

Business Plan

A well-developed business plan is essential, especially for new businesses or when seeking large loans. A compelling business plan not only demonstrates your commitment, but also reassures lenders that you have a strategy and clear path for sufficient cash flow to repay the loan. It should outline:

• Your business goals and objectives.
• Detailed financial projections, including anticipated revenue and expenses.
• A clear explanation of how you’ll use the loan.

Collateral

Many loans, particularly secured loans, require collateral to back the borrowed amount. Offering collateral reduces the lender’s risk and may result in lower interest rates or more favorable terms. Collateral can include assets such as commercial real estate, equipment, inventory or accounts receivable.

Some types of funding, such as SBA 7(a) loans, may require both collateral and a personal guarantee. Additionally, some unsecured loan options may still require personal guarantees or blanket liens on business assets. Borrowers should be sure to clarify lender requirements to avoid surprises.

Bank Statements and Financial Documentation

Expect to provide a range of financial documents during your application. Traditional lenders generally require extensive paperwork, whereas online lenders may have fewer documentation requirements. Commonly requested documents may include:

• Bank statements (typically 3 – 12 months).
• Tax returns (business and personal, covering 1 – 3 years).
• Profit-and-loss statements and balance sheets to showcase financial health.
• Proof of collateral (if applying for a secured loan).

It may also be helpful to have documents such as your business license, articles of incorporation, legal contracts and financial projections handy. Organizing these documents in advance can expedite the approval process.

Existing Debts and Obligations

You will also likely have to disclose any and all existing business debts and financial obligations, including loans, lines of credit, business credit cards and payroll expenses. Lenders use this information to assess whether the business is in a position to take on additional debt. Importantly, lenders may use debt-to-asset ratio when making a business lending decision. This metric compares the total amount of liabilities a company has relative to its assets. The ratio is used to measure how financially extended the company is. Having a high ratio indicates more debt relative to assets, and may reduce the likelihood of receiving approval for funding.

How can I increase my chances of getting a small business loan?

While no one can guarantee loan approval, these strategies can significantly boost your chances:

Offer collateral. Secured loans are much easier to receive approval for since they greatly reduce the risk for the lender.

Improve credit scores. Pay down outstanding debts to improve your debt-to-income ratio. Resolve inaccuracies in your credit reports. Keep in mind that both personal and business credit improvements can matter.

Demonstrate stable cash flow. Lenders value businesses with consistent revenue streams and manageable expenses.

Prepare documentation. Ensure all required financial statements, tax returns, and licenses are accurate and readily available.

Consider delaying your application. If you are a newer business with less than two years of operation, consider waiting to apply while you strengthen your financial foundation and revenue.

Choose the right lender. Not all lenders cater to the same industries or loan types. Research lenders whose offerings align with your needs.

How to Qualify for a Business Loan

Online Business Term Loan Requirements

A business term loan is a type of financing for businesses that need fast and streamlined funding to cover immediate business needs. They may also be a good option for borrowers that have difficulty getting approval for other types of business funding.

Common qualification criteria:

• 625+ personal credit score
• 1+ years in business
• $100,000 in annual revenue
• Collateral usually not required

Where to find them:

• Online lenders

Business Line of Credit Requirements

An application for a business line of credit will be evaluated differently than other forms of business credit. This is because the small business owner is approved for a specific amount they can draw from and put to use at any time. As they repay what they’ve borrowed, the amount becomes available to use again. This flexibility is attractive to businesses that experience regular cash flow challenges and seasonal ebbs and flows.

Common qualification criteria:

• 625+ personal credit score
• 6+ months in business
• $25,000 in annual revenue
• Collateral may sometimes be required

Where to find them:

• Banks
• Credit unions
• Online lenders

Bank Term Loan Requirements

A business bank loan, commonly just referred to as a business “term loan” or “small business loan,” is a form of funding in which borrowers receive an upfront sum of money. They then repay the loan amount, along with interest, over a specified period of several months or years.

Common qualification criteria:

• 680+ personal credit score
• 2+ years in business
• Requires collateral such as real estate, equipment, etc.

Where to find them:

• Banks (commonly the one where the borrower has a business bank account)

SBA Loan Requirements

An SBA loan doesn’t refer to a loan issued by the U.S. Small Business Administration, but rather to a government loan program that guarantees loans (issued by a financial institution such as a bank or credit union) to approved small business owners. In addition to having a challenging application process, this type of loan can be one of the more difficult to qualify for. If approved, however, the loans will come with very good interest rates and favorable repayment terms.

Common qualification criteria:

• 640+ personal credit score, but varies based on the specific SBA loan
• Business plan and projections
• Good financial records
• Usually requires collateral

Where to find them:

• U.S. Small Business Administration
• Banks
• Credit unions

Merchant Cash Advance Requirements

Merchant cash advances are a good way for businesses to obtain working capital without having to worry as much about how to repay. With a merchant cash advance, the cash advance is repaid gradually with a percentage of the business’s daily credit card sales. So the loan is only repaid incrementally as money flows into the business.

Common qualification criteria:

• 500+ personal credit score
• 6+ months in business
• $5,000/month credit card sales
• Collateral not required

Where to find them:

• Online providers

Invoice Factoring Requirements

Invoice factoring is a unique type of business funding in which a business “sells” its accounts receivable (its outstanding invoices) in exchange for an upfront payment (generally about 85% of the value of the invoices). The business then pays a processing fee along with weekly interest until the invoice is paid. At that time, the remaining 15% of the invoice’s value is generally paid back out to the borrower.

Common qualification criteria:

• 500+ personal credit score
• 1+ years in business
• Proven, steady cash flow
• Collateral not required

Where to find it:

• Invoice financing companies

Equipment Financing Requirements

Equipment financing allows companies seeking a loan for equipment to use the purchased equipment as collateral for the loan. Similar to the business term loan, the business will make periodic payments to the lender including interest and principal. Once the equipment is paid in full, the business owns the equipment free of any lien.

Common qualification criteria:

• 600+ personal credit score
• 1+ years in business
• $100,000 in annual revenue
• The equipment purchased serves as collateral

Where to find it:

• Equipment dealers
• Banks
• Online lenders

Common Business Loan Application Mistakes

Be thorough when you enter the application process — it might just save you some headaches along the way. These are some common pitfalls to avoid, which can improve your chances of approval:

Inaccurate applications. Double-check all information to avoid errors that could delay or derail your application.

Overlooking documentation. Missing key financial records, such as tax returns or bank statements, can lead to rejection.

Applying to unsuitable lenders. Research lenders who cater to your industry, business size and financial needs.

Requesting too much. Borrow only what you need (and what you can afford to repay!). Excessive loan amounts may raise red flags for lenders.

Making significant changes to the business. Making significant changes to your business in terms of operational strategy or leadership may cause red flags for lenders about the business’s stability.

Waiting until you’re in a pinch. Many businesses wait until they’re really in need of funding before they apply for a business loan. Unfortunately, in those moments the business is least likely to seem like a good business to approve.

Frequently Asked Questions About Business Loan Qualifications

How hard is it to get a business loan?

Many first-time borrowers have challenges receiving approval for business loans. The difficulty of securing a loan depends on factors like your credit, revenue and the lender’s criteria. Online lenders or alternative funding sources such as merchant cash advances and invoice financing often have more lenient requirements, while banks and SBA loans may involve stricter scrutiny. It’s important to ensure that you can repay on time if you receive funding from a source with looser requirements. You don’t want to make it any harder on your business to receive funding in the future.

How long does it take to get a business loan?

The time to approval varies. Traditional banks and SBA loans can take several weeks or even months. Online lenders can generally approve and fund within 1 to 5 business days. Faster funding processes often involve simpler applications with minimal documentation requirements, which make online lenders the quickest option for borrowers in need of fast funding.

Can I use my EIN to get a loan?

Yes, your Employer Identification Number (EIN) is required for most types of business loans. However, lenders may still evaluate your personal credit history in addition to your business’s financials.  Certain funding types such as equipment financing and merchant cash advances may only require an EIN, but you’ll want to present a strong overall financial profile for the best funding terms. Using just an EIN to apply for a loan will make it challenging to receive approval without a solid business credit history. Lenders will also typically require additional documentation, such as a credit report showing a solid credit history and business plan.

The Bottom Line

Applying for a business loan doesn’t have to be daunting. By understanding the eligibility requirements and taking steps to improve your finances, you can increase your chances of securing the funding you need. Whether you’re expanding operations, purchasing equipment, or stabilizing cash flow, the right loan can set your business on a path to success.