Guide To Business Loans

8. 7 Business Loan Requirements

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Business Loans

7 Business Loan Requirements

Oct 25, 2022 • 7 min read
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      If you’re looking to secure a small business loan, there are many things that you will want to make sure are in order and healthy.

      Small Business Loan Requirements

      Lenders consider the following requirements when evaluating a potential small business owner for a business loan:

      • Credit Score
      • Revenue
      • Time In Business
      • Collateral/Personal Guarantee
      • Business Plan
      • Financial Documentation

      1. Credit Score:

      Nearly every lender will look at your credit score when they evaluate you for a potential loan. A credit score is essentially a measure of how likely you are to pay back a loan. It’s calculated over time as you apply for and pay back credit cards, car loans, home mortgages and other debt.

      Business owners of a young company will likely need to show their personal credit score as well as their business credit score (and yes, there are two scores). Depending on the lender, they all have a score threshold they will not go below. For example, the threshold for a bank is often significantly higher than that of an alternative lender—say 680 instead of 550.

      2. Revenue

      It’s difficult for anyone to offer a small business owner a loan if there’s no clear evidence they have the capacity to repay the loan.

      Most lenders will evaluate your ability by comparing your annual revenue against your recurring debt. Nobody wants to see you default on a loan, which is why an early-stage or idea-stage company with no product on the market to sell and no income has such a tough time securing financing. In some cases, a higher monthly revenue will make up for a lower credit score.

      3. Time In Business

      Time in business is another common metric lenders use to measure capacity. Time in business requirements vary widely from six months to two years. A handful of lenders will work with startups.

      4. Collateral/Personal Guarantee

      Collateral is an asset such as property, cash or larger assets like equipment that a loan applicant offers as a guarantee on a loan. If the business defaults on the loan, the lender can claim the collateral.

      Instead of collateral, some lenders will ask for a personal guarantee, which allows the lender to seize personal assets if the business defaults on the loan. Essentially you accept personal liability for the business loan.

      Some lenders offer unsecured business loans, that don’t require collateral. In general, these loans will be harder to qualify for since they are riskier for the lender.   

      5. Business Plan With Loan Proposal

      Along with your business plan, you will want to address how your business will use the loan and expected growth projections.

      What will the capital be used for?

      Lenders will want to know specifics. Are you investing in new equipment? Hiring more employees? Expanding or upgrading your office space? Don’t leave anything out. Specify what it will be used for with corresponding dollar amounts.

      You’ll also want to articulate why you need these improvements. How will these investments grow your business? 

      What is your repayment plan?

      There should be two parts to your answer:

      1. What is your preferred repayment plan (which will then be negotiated)?
      2. What if Repayment Plan A falls through? What if your sales are worse than projected? What’s Plan B?

      Lenders want to see a realistic vision of how the invested capital will expand and grow your bottom line so that, ultimately, they receive repayment.

      What are the qualifications/capabilities of your management team?

      It takes more than money to grow a successful business. If your team is underqualified or experiencing any kind of dysfunction, you’ll want to take this into consideration when you think about the risks of taking on debt. Make sure your team is qualified and has the resume to impress lenders.

      6. Industry

      Many lenders place restrictions on the types of industries they will work with or will have more stringent requirements if an industry is considered high-risk. Certain loan types, such as SBA loans and invoice factoring, also have industry restrictions. 

      The following industries are restricted from qualifying for an SBA loan:

      • Loan packaging
      • Investment or lending
      • Multi-sales distribution
      • Speculation
      • Gambling

      Learn more about SBA loan requirements

      Invoice factoring companies only work with B2B or B2G industries.

      Other lenders specialize in specific industries such as healthcare or eCommerce. By applying through Lendio, we can connect you with the lender that is the best fit for your industry.

      7. Financial Documentation

      Most lenders will require the following documentation as part of the application and approval process:

      1. Income tax returns from previous 3 years: The more profitable your small business looks on tax returns, the more likely it is that you’ll get small business financing. 
      2. Balance Sheet and Income Statement: Make sure your financial statements are 100 percent accurate. 
      3. Personal & Business Bank Statements: Most lenders want to see both personal and business bank statements. You’ll want to be ready to explain any drastic periods where you were low on cash or even went negative.
      4. Business license and registration
      5. Articles of Incorporation.
      6. Business Plan 

      You’re probably more qualified for a small business loan than you think you are. Just take a deep breath, fill out our 15-minute application, and explore your options.

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      About the author

      Lendio's team of experts is here to help you with every nook and cranny of your business. We'll make sure you have the best advice for financing, operations, management, hiring, and much more.

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