Getting a business loan can help your business expand and grow exponentially, giving your business the injection of capital it needs for purchases. Learning how to qualify for a business loan takes a bit of research to make sure you meet the lender’s business loan requirements, such as its minimum credit score, time in business or revenue requirements.
Once you know you qualify, you’re halfway done with the loan process. You simply need to submit a complete application and get approved for the business loan. To make the process as quick and painless as possible, learn the common requirements for business loans and the steps you need to take ahead of applying with your preferred lender.
Business loan requirements
To qualify for a business loan, your business will need to meet the lender’s business loan requirements. Lenders may post their minimum requirements on their websites, but not all of them do. You may need to contact the lender to see if your business qualifies.
Business loan requirements that you’ll need to meet:
Credit score
Your credit is an important factor in qualifying for a business loan because your credit report and score show the lender how you manage your finances. Lenders may look at your personal and business credit scores, so you’ll want to check your credit scores to determine if you’ll be eligible with that lender.
Online lenders tend to relax their credit requirements more than regular banks, accepting personal credit scores around 550 or higher. Banks want to see strong credit, such as a credit score of 670 or higher. Business credit scores range from 0 to 100, with 49 or higher showing fair to strong credit to the lender.
If you haven’t built a business credit score, lenders will rely on your personal credit score to determine creditworthiness. Your credit score gives a picture of your credit profiles and how you manage credit, such as making payments on time and keeping your overall debt load small.
Revenue
Lenders also want to see a steady flow of revenue coming into your business, showing that your business has the finances to repay the business loan. Most lenders set a minimum annual or monthly revenue that you must meet in order to be eligible. Online lenders tend to set this minimum to $100,000 in annual revenue, sometimes less, while banks typically require $150,000 to $350,000 annually.
Time in business
Lenders usually want to work with established businesses that show a track record of success. That’s because startups are risky and could fail within the first few years of running the business.
Time-in-business requirements vary from lender to lender. Online lenders often accept businesses with six months behind them, while banks often require at least two years in business. If you don’t have much time in business, you may be able to get approved with high revenue or by backing the loan with business assets.
Down payment and collateral
Many business loans also require that you put money or assets toward the loan, showing the lender that you’re willing to put your own assets on the line to receive the business loan.
The down payment is an amount of cash that you put down up front, usually a percentage of the loan amount you need such as 10 or 20 percent. Collateral are business assets that you use to back the loan, which secures the loan so that lenders can seize the assets if you fail to make loan repayments.
Having a sizable down payment or collateral can help you qualify for a business loan even if you’re in a financial gray area for approval. Securing the loan with collateral can also help you qualify for lower interest rates or longer repayment terms than an unsecured loan.
Industry
Most lenders bar certain industries from qualifying for a business loan with them due to the risk that industry poses. Certain industries may have a higher rate of failure than others, making them more risky for the lender to approve a business loan. Lenders often post their list of restricted industries on their websites.
Restricted industries may include:
- Illegal gambling
- Illegal or controlled substances
- Pornography
- Political campaigns
- Firearms
- Financial Institutions
- Nonprofits or religious organizations
- Government entities
- Auto dealerships
- Multilevel marketing businesses
Financial documentation
In addition to asking about your revenue, lenders will want to look closely at multiple forms of financial documentation. Again, they want to see that your business has the cash flow to manage business loan repayments. Financial documentation that they may request:
- Business bank statements
- Business and personal tax returns
- Balance sheet
- Profit-and-loss statements
- Appraisals for assets, especially if those assets are used as collateral
Debt obligations
Lenders will also take a look at how much debt your business currently holds. They’re looking to see that your business can handle paying for all debt obligations in addition to a new business loan.
Lenders may use debt ratios to determine if you have enough revenue to cover your debts. First, the debt-to-income (DTI) ratio shows how much debt you have as a percentage of your revenue. Lenders usually like a DTI of 36 percent or lower, though some may accept a slightly higher DTI.
Next, lenders will use the debt service coverage ratio (DSCR), which shows how much revenue you have to cover all your debts. They typically like to see a DCSR of 1.25 or higher, showing that your revenue is at least 1.25 times higher than your debts.
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Be aware that just because you pass the thresholds for these debt ratios doesn’t necessarily guarantee that you have plenty of revenue to cover debt repayments. You will need to see the full cost of the loan repayments and insert that repayment amount in your business’s budget to see if you can manage it. If you don’t have enough in your budget to cover the repayments, you can’t afford the debt.
5 Steps to qualify for a business loan
As long as you meet the lender’s business loan requirements, you should qualify for a business loan with ease. Follow these steps when applying for a business loan:
1. Check your credit score and update your financials.
You’ll want to check your business and personal credit scores prior to applying so that you know right away if you meet the lender’s business loan requirements.
You’ll also want to take a look at your business finances to see if your revenue will cover all your expenses, including a business loan repayment. You may want to update your revenue forecast, ensuring that you have an accurate idea of how much you expect to bring in during the term of the loan.
2. Choose the right type of business loan.
You can choose from a variety of business loans available to meet your funding needs. You’ll want to research which business loan will serve your needs best before applying for a loan. Knowing the type of loan you need will help you narrow down your options to lenders that offer that loan.
For example, if you need to purchase business equipment, an equipment loan with its low interest rates may serve you best. If you need fast funding to cover cash flow gaps while waiting for customer invoices to be paid, you may decide to go with invoice financing or a business line of credit.
3. Research lenders and their eligibility requirements.
Now that you know your credit score and the type of loan you need, you’ll want to research multiple lenders to find the best fit. Regular bank lenders will offer you the most competitive interest rates and terms if you have strong credit. But if you have less-than-perfect credit or low revenue, you might want to research online lenders. Check with each lender to understand their business loan requirements and see if you can meet those requirements.
4. Gather documents and apply for the business loan.
Next, you want to narrow down your list of lenders to a few lenders that you want to work with. Start the application process by gathering all your financial and business documents so that you can apply. In addition to the financial documents listed above, lenders may want to see your business formation documents, your Employer Identification Number (EIN), business licenses and any lease agreements you have. Then, you can fill out the application either online or in person submitting the documentation when it’s requested.
5. Wait for the lender’s response.
Finally, you’ll submit the application and wait for the lender to reach out to you about its business loan decision. The lender may request additional documents during the process. Keep an eye out for communication from the lender so that you can keep the underwriting process moving swiftly. Online lenders may take 24 to 48 hours to approve the loan, while you may wait up to a week or more if you went with a bank lender. When you’re approved for the loan, you’re free to use the funding for your business purchases.