The small business loan requirements for any form of commercial funding will vary widely, depending on the lender you work with and the type of financing you’re applying for.
In this guide we’ll break down the most common business loan requirements, as well as review how to qualify and apply for a small business loan.
A Quick Guide to Business Loan Requirements
So, what is required for a small business loan?
As we mentioned above, some of the requirements you’ll need to meet in order to qualify for a business loan will vary based on the lender you’re working with. To this point, bank loan requirements for businesses, for example, will be very different from the new business loan requirements of an online lender.
Fortunately, though, there are still several eligibility criteria that small business lenders have in common. Although not all lenders will require this full list of business loan requirements, it’s safe to assume that you’ll need to provide core credentials such as your personal credit score, annual revenue, and time in business.
Every lender will ask how long you have operated your business. The longer you’ve been in business, the better it is for your application because it shows a lender that your business has had long-term success.
Although banks may be less likely to lend to business under two years old, online lenders will often have more flexible requirements with regard to your time in business.
One of the most important business loan requirements you’ll need to qualify for financing is your personal credit score.
Lenders will ask for your personal credit history and financial information to assess the likelihood that you’ll pay back your loan—if your personal finances are strong, lenders assume this means you’ll be able to manage your business finances as well. This being said, your personal credit score will not only influence whether or not you’re approved, but it will also play a role in determining your loan interest rate.
Ultimately, the better your personal credit score is, the more loan options you’ll have available to you. You’ll want to aim for a credit score of at least 600—and ideally, even higher, especially if you’re looking to qualify for a bank or SBA loan.
Similar to the way your personal credit score indicates your history as a borrower, your business credit score measures your business’s creditworthiness. Your business credit score is based on your business’s history of payments to suppliers and lenders. Your business’s industry, size, and revenue can also impact the score.
Many entrepreneurs are unaware that their business has a credit score—or even that it’s a common small business loan requirement. This being said, there are three main agencies that track business credit, and each has its own method for evaluating your business credit score. Additionally, many lenders use the FICO SBSS score to evaluate your loan application, as it’s based on a combination of your business credit score from the other three agencies, as well as your personal credit score and business’s financials.
Therefore, before applying for a small business loan, it’s important to have a sense of what your business credit score looks like. Although not all lenders will check this score, those that do may pull it at any time during underwriting.
Your business’s annual revenue and profits will also be one of the most common small business loan requirements you see across different lenders.
Typically, lenders will want to see both a year-to-date profit and loss statement, updated within the past 60 days, and statements from the previous two years.
This being said, overall, banks will want to see that your business is profitable in order to approve you for financing. Alternative lenders, on the other hand, will not often require profitability, but will usually have annual revenue minimums.
Ultimately, regardless of the specific lender’s requirement, the stronger your business financials (as shown through your annual revenue and profits) the more likely you will be to qualify for financing, and business financing with the most affordable rates.
Lenders will use your bank statements to determine if you can afford your loan and will be able to pay it back. Bank statements can also give lenders some insight into how well you manage the cash coming into your business.
Therefore, at a minimum, lenders will usually ask for four months of business bank statements to support the claims you’re making about your company’s financial history. If you’re applying for an SBA loan or conventional bank loan, you should be prepared to provide even more bank statements.
Just like your personal and business credit scores, lenders will use your tax returns to evaluate the health of your personal and business finances, and therefore, your ability to afford and pay back a business loan.
Generally, you’ll need to provide at least the past two years of your personal tax returns. These documents will be especially important if you have a pass-through entity (a sole proprietorship, partnership, or S-corp), where you report your business’s profits and losses on your personal tax return.
This being said, your business tax returns will be particularly influential if you have a corporation or an LLC that’s taxed as a corporation. In these cases, the lender will use your last two years of business tax returns to verify your revenue, profit, and expenses.
It may seem obvious, but a typical small business loan requirement will be a statement describing what you plan to use the loan funds for.
In this statement, you’ll want to be as specific as possible—generally, lenders allow a variety of loan uses, they want to make sure, however, that the amount of money you’re requesting matches up with the purpose for the loan.
Directly related to the loan purpose, you’ll need to also specify your loan amount—in other words, how much money you want to borrow from the lender.
Generally, banks have access to the most capital and can issue loans that are six and seven figures.
Therefore, if you need a smaller amount of money (less than $250,000), banks will usually not be the best route. For smaller amounts of funding, you’ll likely want to turn to alternative lenders, and in some cases, SBA loans.
With this business loan requirement, it’s important to be straightforward and clear about how much financing you require (as well as how you’ll use it)—and of course, you don’t want to ask for more than you can afford.
A business plan or loan proposal won’t always be on the list of the small business loan requirements, but it will be for some.
For traditional term loans and SBA loans, for example, you’ll definitely need to provide a business plan for funding.
Within your business plan, you’ll have an opportunity to lay out both your financial goals—future sales, profits, income, cash flow, etc.—and your qualitative business goals. You’ll want to use this document to show your lender that you’ve thought about all the potential opportunities and challenges for your business and how you’re going to grow a successful company.
In short, your industry can affect your eligibility to get a business loan because every industry has a different level of risk.
This being said, most lenders have certain industries that they won’t lend to—such as firearms businesses and adult entertainment businesses—that could impact the lender’s reputation. However, some lenders also have less obvious restrictions. For instance, some lenders bar child care businesses, health care businesses, law offices, apparel companies, and financial companies.
Therefore, in order to ensure you’ll meet a lender’s industry requirement, you’ll want to check with them regarding any ineligible industries before submitting your application.
With this in mind, you’ll also want to make sure that you have correctly identified your business’s industry in your loan application—a small mistake could delay your application or even cause a lender to mistakenly reject it. There are two main industry code systems—Standard Industrial Classification (SIC) and North American Industry Classification System (NAICS). You can look up your code on the NAICS website.
Perhaps one of the simplest business loan requirements, a lender will likely ask you to report your business entity type.
From your lender’s perspective, knowing how your company is organized can give them insight into how you manage and operate your small business. Additionally, although it’s rare, some lenders won’t lend to sole proprietorships and partnerships.
Similar to your business entity information, another common business loan requirement is your business license or permit.
Although business license requirements vary by state and locality, lenders will want to see your proof of ownership and license to operate a business.
Additionally, depending on the size, location, and type of business, you may also need to provide proof of any relevant fire permits, sign permits, zoning permissions, environmental, sales tax, and health department permits.
Although you may not need an EIN for every business loan application (or for your business, depending on your entity type), you should specify your EIN on an application if you have one.
Overall, an EIN is like a social security number for businesses—the IRS uses this unique, nine-digit number to track your business’s tax returns. You can quickly and easily apply for an EIN online, and once again, although this number may not be required for all businesses or all loan applications, it may be worth getting one nevertheless.
Although collateral isn’t always required, you may be asked to put up a fixed asset—like property or equipment—to secure your loan with a lender. Therefore, if you default on the loan, the lender can seize your collateral and use it to make up for some of the money they’ve lost.
Not all lenders will require specific collateral—however, if you’re applying for an SBA loan or bank loan, for example, lenders will want to know what kind of collateral your small business has to offer, and the value of that collateral.
In addition to the other financial information we’ve discussed, many lenders will also ask to see your balance sheet as part of their small business loan requirements. Like your profit and loss statement, your balance sheet will help show a lender how your business functions and whether or not your financials are in good standing.
Essentially, a lender will want to use your balance sheet to see that you have enough assets to cover your business’s operating expenses and pay back your loan on time and in full. Therefore, you should have your year-to-date balance sheet and the last two years of balance sheets (if you’ve been in business that long) ready to go as part of your application.
If you have a brick and mortar business, you should include a copy of your lease along with your other commercial loan documents.
A commercial lease proves that your business will be able to use the property for as long as the duration of the lease, no matter what happens to the landlord—and it also reassures your lender that you’ll be able to conduct business to pay back the loan.
Small business lenders are very careful about lending to business owners who already have other loans, as they don’t want to offer you financing if you can’t afford your current loan payments–and for this reason, you might be asked to provide a business debt schedule as part of your loan application.
This being said, to evaluate whether you can afford a loan, lenders often calculate your debt service coverage ratio (DSCR).
The ratio illustrates your current debt and interest payments in relation to your current incoming cash flow. If your DSCR isn’t high enough, the lender may reject your application or ask you to reapply later after you’ve further paid down existing debt.
One of the more common bank loan requirements is current accounts receivable (A/R) and accounts payable (A/P) aging reports. A/R and A/P aging reports show a lender how efficient your business is at receiving payment for goods and services and paying bills of its own.
The A/R report indicates the number of invoices you’ve sent to clients that are overdue and the length of time by which they are overdue. If this report shows too many accounts, it means your business hasn’t been very effective at collecting payments. On the other hand, if your A/R report has few overdue accounts, it means your repayment collection methods are effective, you extend credit to the right kind of customers, and your customers pay off debt quickly.
The A/P report is the opposite—showing the number of invoices from other businesses that you haven’t paid. A high number of delinquent accounts indicates that you’re not good at managing your expenses. You ideally will want to have a low number (or zero) overdue accounts on your A/P report.
When you’re applying for a business loan, you should be prepared to disclose any ownership that you or your partners have in other businesses as well as any affiliations, such as being a board member or consultant in another business. This information discloses any potential conflicts of interest that the lender may have with issuing the loan and any synergies that your business may have with other companies.
This being said, it can be more difficult to apply for a loan if your business has multiple owners. Different lenders have different rules on how many owners need to approve a loan request. The SBA, for example, checks the personal financial information of anyone who owns 20% or more of the business and requires a personal guarantee from all of these owners. Other lenders may require approval from just 50% or 70% of overall ownership.
With this in mind, anyone who needs to authorize the loan will need to provide a copy of their photo ID, a resume, a personal credit score, and other personal financial information that the lender requests.
Finally, the last of the most common business loan requirements you’ll be asked to provide will be legal contracts and agreements that your business already has. Along these lines, lenders might ask to see any of the following:
Although this list may seem overwhelming, depending on your lender, you may not need every one of these qualifications for your business loan application.
Ultimately, because small business loan requirements are so variable, it’s important to consult a lender about their process before actually submitting an application—this way, you’ll be prepared ahead of time to gather any documents or information you’ll need to submit, and therefore, optimize the process and hopefully, increase your chances for approval.
With all of this in mind, let’s continue our discussion by reviewing the basic steps you’ll want to follow to access a business loan.
Use our guide for more details on how to get a business loan.
At the end of the day, as you compare your options and search for the right business funding solution, you’ll want to remember that banks and SBA loans will require the most documentation and highest qualifications, but will also offer the most desirable rates and terms.
Alternative lenders, on the other hand, will have simpler application processes and more lenient qualifications, but their products will generally have shorter terms, lower amounts, and higher interest rates.
This being said, although the qualifications you need to meet will be specific to the loan product and the lender, by understanding the most common business loan requirements, as we’ve discussed, you’ll be in the best place to gather the necessary documentation and quickly and accurately complete your loan application.
Follow our guide for more information on how to apply for a business loan.
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.