The Small Business Owner’s Guide To Business Loan Requirements & Qualifications

If your business is ready for a loan, the first step is to know and understand basic business loan requirements.

In this post, we’re going to look at how lenders evaluate business loan eligibility and what documentation you need to gather so you can navigate the process like a pro and receive the funding your business needs.

How Lenders Use The 5 C’s Of Credit To Evaluate Loan Eligibility

To mitigate the risks of lending, lenders use a system known as the 5 Cs of Credit.

The 5 Cs of Credit are:

Lenders evaluate the 5 Cs to determine how risky it will be to lend to your business. The higher the risk, the less likely you are to get approved. The lower the risk, the more likely you are to be approved, receive favorable terms and rates, and qualify for higher borrowing amounts.

Small Business Loan Application Requirements

Applying for a business loan doesn’t have to be complicated if you know what to expect during the application process.  Here’s the essential information and documentation you’ll need for your small business loan application.

Loan Amount

You’ll need to provide the amount of money you wish to receive on your loan application. If you’re unsure of how much to request, here are a few things to remember:

• Calculate Costs: Talk to vendors, get quotes and bids, and compare costs to calculate how much you need to borrow.
• Determine Affordability: Use DTI and DSCR formulas to determine if you will be able to afford your loan payments for the amount you’re requesting.

Loan Purpose

The purpose of your loan will need to be added to your loan application. Some common reasons for taking out a small business loan are:

• Purchasing or replacing equipment
• Purchasing inventory or supplies
• Buying land or commercial real estate
• Acquiring a business
• Working capital
• Covering an emergency expense
• Refinancing business debt

Some lenders have restrictions on how loan proceeds are used, so make sure you understand all terms and conditions before applying.

Personal Credit Score & History

Lenders use your personal credit score and history to determine if you qualify for a loan and calculate your interest rate and repayment terms.

Borrowers with good to excellent credit will score the lowest rates and best terms. Borrowers with credit challenges will likely face higher rates, less favorable terms, and a higher overall cost of borrowing.

Lenders will also look at your credit history. Negative items, including bankruptcies, foreclosures, loan defaults, and late or missed payments, could affect your eligibility, rates, and terms.

Unsure of where you stand? Before you apply for a loan:

• Pull your free personal credit score
• Review your credit report to identify any errors
• Dispute errors with the major credit bureaus

If you have a low credit score, identify any problem areas and work to resolve these issues before applying for a loan. There are also a number of small business loan options available for borrowers with low credit scores, a short time in business, or low revenues.

Business Start Date

Your loan application will include the date your business started. Most lenders like to work with established businesses that have been in operation for at least two years.

Startups and new businesses often find it difficult to qualify for traditional loans.  Loan options for newer businesses may be limited, and additional documentation may be required by the lender.

Monthly Revenue

To get a loan, you must be able to repay the loan. Monthly revenue shows the lender that you have sufficient cash flow to make your loan payment.

Most lenders require monthly bank statements, profit and loss statements, and other documentation to verify your monthly revenue.

Annual Revenue

Your lender may also want to see your business’s annual revenue. This can be shown using prior years’ personal and business federal tax returns.

Your business may also be required to provide balance sheets, year-to-date profit and loss statements, and other documentation.

Bank Statements

The easiest way to show a lender that you have the means to repay a loan is with your bank statements.

Bank statements give an overall picture of your business financials. Lenders use your bank statements to see your current balance, assess your cash flow, and understand how you manage your finances. This information is used to determine if you’ll be a responsible borrower.

At a minimum, expect to provide your lender with at least 3 months’ worth of business bank statements. However, some lenders (such as Small Business Administration intermediaries and banks) may require bank statements from the last 6 months or longer.

Business Debt Schedule

You may need to provide your lender with a business debt schedule. This breaks down what you pay each month for the current debt obligations of your business. This information is used to determine if adding a new loan payment makes sense for the lender and your business.

Proof Of Ownership

When applying for a loan, you’ll need to prove to the lender that you are the owner of the company. You can prove ownership with business licenses and permits.

Collateral

Some lenders require you to put up collateral to receive your loan. Collateral is assets that can be seized and sold if you default on your loan.

Collateral requirements vary by lender, as well as other factors including the type and amount of the loan. Some lenders may require:

• A proof-of-collateral letter that lists specific asset(s) used to secure the loan
• A blanket lien that gives the lender the right to seize any of your business assets
• A personal guarantee that holds you personally liable for the loan

Make sure that you understand all collateral requirements and know what you sign before accepting a loan.

Business Loan Requirements By Loan Type

While most loans have the same basic requirements, such as bank statements and your federal tax ID, additional documentation and information may be required for certain types of loans.

The Bottom Line On Business Loan Requirements

Applying for a business loan doesn’t have to be complicated or intimidating. While the process can be long, the best way to expedite the process is being prepared in advance. Know how much you need and why you need it. Understand what your business can afford and have the documentation and information needed to show the lender that your business is ready for a small business loan.