Depending on the lender you are negotiating with some of the conditions you may need to follow can fluctuate extensively. For example, a loan from a bank will have different requirements than one from an online lender. However, there are also some eligibility standards for small business loans that apply in all cases. The following loan criteria may not be needed for all lenders, but in most cases, you should be prepared to show certain key metrics such as your personal credit score, annual sales, and amount of time in business.

Depending on the lender you are working with and the type of financing you are applying for, the conditions for commercial funding can vary widely. We will break down the most common conditions for business loans in this guide, as well as how to qualify and apply for a small business loan.

What are the requirements for a small business loan?

Depending on the lender you are negotiating with some of the conditions you may need to follow can fluctuate extensively. For example, a loan from a bank will have different requirements than one from an online lender. However, there are also some eligibility standards for small business loans that apply in all cases. The following loan criteria may not be needed for all lenders, but in most cases, you should be prepared to show certain key metrics such as your personal credit score, annual sales, and amount of  time in business.

There are 18 qualifications that you will likely need when applying for a business loan:

1. Duration of Business

Every creditor is likely to ask how long you have been operating your business. The longer you have been in business, the stronger the application is, as it indicates to an investor that the business has been profitable for the long run., It is not impossible to get a loan if your business is under two years old, but it does limit your options. While banks may be less willing to lend to companies under two years of age, online lenders may be more flexible.

2. Personal Credit Score & Business Credit Score

Your personal credit score is one of the most significant factors in applying for funding. In order to determine the chances that you can pay back your loan, lenders will ask for your personal background records and financial details. If your personal finances are solid, lenders believe this implies that you will be able to handle your company finances. Not only will your personal credit score impact whether or not you are approved, but it will also play a part in deciding the interest rate of your loan. In the end, the higher your personal credit score is the more credit opportunities you will have at your hands. If you are trying to apply for a bank or SBA loan, ideally, you would want your credit score to be 600 or above.

Your business credit score tests the creditworthiness of the organization, similar to the way your personal credit score shows your personal background as a borrower. Your business credit score is determined by your company’s history of payments to vendors and lenders. The sector, scale, and sales of your organization will also affect the metric. Most entrepreneurs are unaware that their organization has a credit score, or even that it is a basic condition for small business loans. 

There are three major business credit rating organizations, and each has its own system for determining the business credit score. In addition, many lenders use the FICO SBSS score to determine your loan application, since it is focused on a mixture of the other three agencies company credit score, your personal credit score and the financials of your corporation.

Therefore, it is important to get a sense of what your company credit score looks like when applying for a small business loan. Although not all lenders check this score, for those who do, it can be a very important factor.

3. Company Annual Revenue, Profits, and Earnings

The annual revenue and profits of your business is one of the most common requirements for small business loans that you see across various lenders. Generally, 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. Generally, banks would like to see that the organization is successful before it approves funding for you. Whereas, some alternative lenders will not necessarily look at long term profitability, but often require a minimum level of annual sales.

Regardless of the particular lender’s requirement, the better the business financials appear (as seen by your annual sales and profits) the more likely you are to qualify for credit and business financing at the most affordable and competitive pricing.

4. Bank Statements

In order to determine whether you can repay the loan, lenders review your bank statements. Bank statements will also provide lenders with some understanding into how well you manage the funds flowing into the business. Therefore, lenders would typically ask for business bank statements for the past three months, at a minimum, to justify your financial record claims of the firm. If you are applying for an SBA loan or traditional bank loan, you should be prepared to provide additional bank statements.

5. Personal and Business Tax Returns

Lenders may look to your business records, including taxes, in addition to your personal financial statements, to determine your capacity to afford and pay back a business loan. Typically, you would need to include your personal tax returns covering at least the last two years. If you have a pass-through entity (such as a sole proprietorship, corporation, or S-corp), where you disclose the income and expenses of your business on a personal tax return, these records would be essential. However, if you have a corporation or an LLC (that is taxed separately from you as an individual), your business tax returns would be especially relevant. Under these circumstances, the previous two years of business tax returns will be used by the lender to check your income, benefit, and expenses.

6. Loan Amount & Reason for Loan

You will need to determine the sum you would like to request for your business loan.. Banks typically have access to the most capital and can issue six and seven-figure loans. Therefore, banks would typically not be the ideal path if you are looking for a smaller loan (less than $250,000), in that case, you should shift to alternative lenders for smaller sums of funding, and in certain circumstances, SBA loans. It is important to have a strong grasp of how much money you need, as well as how you are going to use it, and of course, you do not want to apply for more than you can manage.

It might seem obvious, but lenders will want to know why you are seeking a business loan. A statement outlining how you intend to use the loan funds will be required for small business loans. Typically, lenders approve loans for an assortment of reasons, but they want to make sure that the sum of money you are seeking suits the intent of the loan.

7. Business Strategy

Often, business strategy will not be on the list of small business loan requirements, however, it is possible. For example, if applying for a conventional term loan or SBA loans, you will likely need to present a business strategy. You would have to set both your financial targets and your qualitative market goals inside your business strategy, such as potential revenue, earnings, taxes, cash flow, etc. To effectively prove to your lender that you have thought of all the possible possibilities and obstacles for your company and how you are going to develop a profitable business, you may want to use this guide. 

8. Industry Type

Since each industry has a different degree of risk, the industry you are in will impact your eligibility to get a business loan. Most lenders have some sectors to which they would not lend, such as gun firms and adult entertainment companies, which could harm the reputation of the lender. Though, these restrictions will vary from lender to lender, and may even include restrictions on lending to certain states. Therefore, in order to ensure that you fulfill the industry criteria of a lender, before sending the application, you may want to consult with them on any restricted industries.  It is important in your loan application to have correctly defined the industry of your company, as a minor error may prolong your application or even lead a lender to deny it erroneously. The Traditional Industrial Classification (TIC) and the North American Industry Classification System (NAICS) are two main industry coding schemes. You can find your code on the NAICS website.

9. Entity Type

A lender will want to know the corporate structure of your business.,. From the viewpoint of your investor, learning how your company is structured will give them insight into the types of risks and liabilities your company, and you personally, may be vulnerable to.u.

10. Business License and Permits

Your business license or authorization is another common business loan prerequisite. While standards for business licenses differ by state and locality, lenders will want to see your evidence of ownership and authorization to manage a corporation. This will provide the lender with confidence that they are loaning funds to a properly managed, productive organization. 

11. Employer Identification Number (EIN)

While you may not require an EIN on an application for business loans (or even for your business depending on your entity type), if you have one you can include the EIN on an application. An EIN is like a corporate social security number; the IRS uses this special, nine-digit number to track the tax returns of the company. You may apply for an EIN electronically rapidly and conveniently, and again, while this number might not be needed for all firms or all loan applicants, it is nonetheless worth having one.

12. Proof of Collateral

While collateral is not necessarily needed, you may be asked to put up a fixed asset to protect your loan from a lender, such as land or machinery. If you default on your loan, the investor will take the collateral and use it to make up for any of the funds you have not repaid. Alternative lenders usually do not require collateral, however, they will still likely require some protective measures, , such as a personal assurance or blanket lien, in order to lend to your business. 

13. Balance Sheet

Some lenders might want to see a balance sheet as part of their small business lending criteria, in addition to the other financial statements we have mentioned. A lender would want to use the balance sheet to see if you have adequate funds to handle the running costs of the corporation to pay back your loan on schedule and in full. Therefore, as part of the filing, you should have your year-to-date balance sheet and the past two years of balance sheets (if your business has been open that long) ready to be included in your application.

14. Copy of Your Commercial Lease

If you have a brick and mortar company, you should include a copy of your lease enclosed with a commercial loan documentation. A commercial lease shows that, regardless of what happens to the borrower, the company will be allowed to utilize the property for as long as the term of the agreement, and it also reassures the investor that you will be able to conduct business and pay back the loan.

15. Disclosure of Other Debt (Business Debt Schedule)

If your business already has other loans, and does not meet the existing loan obligations, lenders will not want to fund your business. Lenders will also measure your DSCR (debt service coverage ratio) to assess whether the business will be able to manage the loan. If the DSCR ratio is not large enough, after you have further paid off existing debt, the lender will refuse your application or ask you to reapply later.

16. Accounts Receivable Aging and Accounts Payable Aging

One of the most traditional bank loan conditions is current accounts receivable (A/R and accounts payable (A/P) aged reports. A/R and A/P aging studies inform the lender on how efficient the organization is at collecting products and services payments and paying its own bills. 

The A/R summary reveals the amount of invoices you have submitted to outstanding accounts and the duration of time they are overdue. When there are many accounts shown in this report, it means the organization has not been really successful at collecting payments. However, if there are few outstanding accounts on your A/R report, it means that your methods of repayment collection are effective, you extend credit to the right kind of consumers, and your clients pay off debt efficiently in a timely manner.

The A/P report is the opposite, displaying the amount of invoices you haven’t paid by various firms. A high number of missed payments indicate that you are not efficient in managing your own expenses. Realistically you would want the A/P report to have zero overdue accounts.

17. Ownership and Affiliations

You should be prepared to reveal any ownership that you or your partners have in other companies, as well as any affiliations, such as becoming a board member or contractor in another company, when you apply for a business loan. This knowledge shows any future conflicts of interest the investor might have in the granting of the loan and any synergies the organization might have with other businesses. Having said that if the company has many members, it can be more complicated to qualify for a loan. Different lenders have differing guidelines for how many owners need a loan request to be accepted. For instance, the SBA reviews the personal financial records of someone who holds 20% or more of the corporation and allows any of these shareholders to have a personal pledge.

With this in mind, a copy of their photo ID, a resume, a personal credit score, and any personal financial documents that the investor demands would need to be submitted.

18. Legal Contracts and Agreements

Lastly, when applying for a business loan you may be requested to provide legal contracts and agreements that your company is a party to. Lenders are looking for the following: 

  • Contracts with major suppliers or other third parties
  • Corporate bylaws
  • LLC operating agreement
  • Partnership agreement
  • Franchise agreement
  • Sales agreement, financials, and information about the business you’re purchasing (if you’re using the loan to buy another business)
  • Commercial real estate purchase agreement or equipment purchase agreement (if the loan is being used for purchasing commercial real estate or equipment)

How to qualify and apply for a small business loan

While this list may appear daunting, you may not require all of these requirements for your business loan application, depending on your lender. Finally, since small business loan requirements are so subjective, before submitting an application, it is recommended to contact a lender about the process, so that you can be informed in advance to compile any paperwork or details you may need to apply, which will improve your likelihood of approval. 

These are the essential measures you’ll want to undertake in order to obtain a business loan:  

  1. Determine that a small business loan is important for you.
  2. Evaluate how much debt you can afford.
  3. Compare the options for your loan.
  4. Gather loan documents and paperwork.
  5. Submit your request for your loan.

In Summary

You may want to note that banks and SBA loans will demand the most paperwork and the highest qualifications, but will also provide the most attractive rates and conditions. On the other side, alternative lenders may have faster screening procedures and more lenient qualifications, but typically their loans will have shorter terms, smaller sums, and higher interest rates.  Though ultimately the specific qualifications you need to meet will vary from lender to lender, the more you know about the general framework of business loans and the application process, the better position you will be in to successfully navigate the process and receive a loan.

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