Business Loan Requirements: How To Qualify For A Business Loan

Jerry Brown is a personal finance writer based in Baton Rouge, La. He’s been writing about personal finance for three years. Financial products he enjoys covering include credit cards, personal loans, and mortgages.

Jerry Brown Contributor

Jerry Brown is a personal finance writer based in Baton Rouge, La. He’s been writing about personal finance for three years. Financial products he enjoys covering include credit cards, personal loans, and mortgages.

Written By
Jerry Brown Contributor

Jerry Brown is a personal finance writer based in Baton Rouge, La. He’s been writing about personal finance for three years. Financial products he enjoys covering include credit cards, personal loans, and mortgages.

Jerry Brown Contributor

Jerry Brown is a personal finance writer based in Baton Rouge, La. He’s been writing about personal finance for three years. Financial products he enjoys covering include credit cards, personal loans, and mortgages.

Contributor
Reviewed by
Jordan Tarver Former Staff Editor

Jordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor’s degree in business finance, his experience as a top perf.

Reviewed by
Jordan Tarver Former Staff Editor

Jordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor’s degree in business finance, his experience as a top perf.

Reviewed by
Jordan Tarver Former Staff Editor

Jordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor’s degree in business finance, his experience as a top perf.

Reviewed by
Jordan Tarver Former Staff Editor

Jordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor’s degree in business finance, his experience as a top perf.

Former Staff Editor

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors’ opinions or evaluations.

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Table of Contents

• 1. Business & Personal Credit Scores
• 2. Annual Business Revenue & Profit
• 3. Time in Business
• 4. Debt-to-income Ratio
• 5. Debt-service Coverage Ratio
• 6. Collateral for Secured Loans
• 7. Type Of Industry
• 8. Business Plan

Taking out a business loan—whether to cover payroll or purchase inventory—can provide financing to help in difficult times, improve your cash flow or grow your business. While each lender has its own rules, there are common business loan requirements you should be aware of when preparing to apply.

1. Business & Personal Credit Scores

When you submit a business loan application, a lender will typically review both your personal and business credit scores to assess the risk you pose. While a bad personal credit score can hurt your chances of approval, a good personal credit score can improve your loan approval odds and help you secure a lower interest rate.

What’s considered a good or bad personal credit score varies according to the credit scoring model a lender uses and its own guidelines. One of the most widely used credit scoring models—FICO—ranges from 300 to 850. While scores below 580 are considered bad, a score of at least 670 is considered good.

Although minimum credit score requirements vary, some online lenders may approve you for a business loan with a personal credit score as low as 500. A traditional lender like a bank may require you to have a minimum score as high as 680, however.

Similar to personal credit scores, what’s deemed a good or bad business credit score also varies based on the credit scoring model a lender uses. One of the most popular business credit scoring models— Dun & Bradstreet (D&B) PAYDEX —ranges from 0 to 100. A good score ranges from 80 to 100; a bad business credit score ranges from 0 to 49.

2. Annual Business Revenue & Profit

Lenders often have minimum annual revenue requirements, and some have minimum monthly revenue requirements, too. To confirm your business’ earnings, a lender will request your business’ bank statements and income tax returns. You can upload your bank statements manually or allow a lender to connect to your bank and analyze your statements, if available.

In addition, some lenders may ask to see your profit and loss statements to determine if you have enough positive cash flow to afford your loan.

3. Time in Business

Businesses that have been in operation for longer have a greater chance of loan approval. While minimum time requirements vary, it’s common for traditional lenders to require you to have at least two years in business. Online lenders often require applicants to be in business for at least six months to a year.

However, this requirement may vary depending on the specific type of business financing. For example, with invoice factoring, which involves selling unpaid invoices to a factoring company, a lender may require that you’ve been in business only for three months.

4. Debt-to-income Ratio

Some lenders will review your debt-to-income (DTI) ratio to determine whether you can afford to take on additional debt. Your DTI ratio weighs your monthly debt against your gross income.

You can calculate the DTI ratio by dividing your monthly debt by your gross income. For example, if your monthly debt is $10,000 and the gross income is $20,000, your DTI ratio is 50% ($10,000/$20,000).

The higher your DTI ratio, the greater your risk is as a potential borrower. While minimum DTI requirements vary by lender, it’s a good idea to keep your DTI ratio at or below 43%.

5. Debt-service Coverage Ratio

Another ratio some lenders consider is the debt-service coverage ratio (DSCR), which measures your business’ annual net operating income in relation to its total annual debt. Remember, annual net operating income is another way to say earnings before interest, taxes, deductions and amortization (EBITDA).

To calculate your DSCR, divide your business’ EBITDA by its total annual debt. For instance, if EBITDA is $100,000 and its total annual debt (including the business loan you’re applying for) is $80,000, the DSCR is 1.25 ($100,000/$80,000). A ratio greater than 1 shows a lender your business will likely have enough income available after expenses.

Although DSCR requirements vary by lender, U.S. Small Business Administration (SBA) loans require a minimum DSCR of 1.15.

6. Collateral for Secured Loans

Lenders offer both unsecured and secured business loans. If you apply for a secured loan, lenders require you to pledge collateral—something of value, such as accounts receivable or real estate—that they can seize if you fail to repay the loan.

The collateral requirements can vary, depending on your specific loan. For instance, you could take out a loan to purchase a business asset—like equipment, a business vehicle or commercial real estate. The collateral in that scenario would be the asset purchased. This means if you purchase equipment such as a commercial printer, the printer will serve as collateral.

In addition, some lenders will require you to provide a personal guarantee, which means you accept responsibility for repaying the loan with your personal assets if the business fails to do so.

7. Type Of Industry

The industry you operate in also plays a factor in whether you qualify for a loan. That’s because each industry has a different risk factor and some lenders are restricted from working with certain industries, such as adult entertainment businesses, gambling businesses and not-for-profit businesses. Before you apply, contact the lender to check your industry’s eligibility.

8. Business Plan

Some lenders may require you to share your business plan, especially if you’re a startup , which may include the following:

• Financial projections
• Purpose of using the funds
• Industry outlook
• Competitive analysis

Your plan should provide a lender with a detailed outline of how you intend to use the loan funds and include a five-year forecast of cash flow, income and expenses. If you’re unsure how to write a business plan, you can find sample business plans on the SBA’s website .

Documents Needed For a Business Loan

Before you apply for a small business loan , gather the required documents. A lender will likely ask for some or all of these items:

• Bank statements
• Personal and business tax returns
• Business licenses and permits
• Employee Identification Number (EIN)
• Proof of collateral
• Balance sheet
• Copy of your commercial lease
• Disclosure of other debt
• Accounts payable and accounts receivable aging
• Ownership and affiliations
• Legal contracts and agreements
• Your driver’s license
• Business insurance plans
• Payroll records
• Incorporation documents
• Business plan

To get a list of all required documents, review your lender’s website and/or contact them before applying.

Beware of Common Business Loan Application Mistakes

One-third of business loan applications are rejected by lenders, according to a 2019 Federal Reserve survey. Some of those loan denials are unavoidable, but mistakes can also lead to rejections.

With the right preparation, you can avoid those mistakes.

• Waiting until the last minute. As a small business owner, you’re busy. Yet, procrastinating on applying for a business loan can lead to mistakes, or you simply won’t have the time to find the best rates.
• Filling out forms incorrectly. It’s quite common for lenders to reject otherwise-good applicants simply because they didn’t complete the loan application correctly or submit the right forms.
• Not having a clear plan for the loan funds. Most lenders will want to know how you decided on the exact amount of funding you need and what you intend to use the loan funds for.
• Making big business changes just before applying. Drastic changes to your business can lead lenders to believe that your current business isn’t going to plan.

Next Steps: Decide What Type of Business Loan You Need

The next step after learning how to qualify for a business line of credit or loan is to find the right type of business loan for your unique needs. Some common types of small business loans include:

• Term loans
• SBA loans
• Business lines of credit
• Invoice factoring
• Working capital loans
• Equipment financing

*American Express® Business Line of Credit offers two loan types, installment loans and single repayment loans for eligible borrowers. All loan term types, loan term lengths, and pricing are subject to eligibility requirements, application, and final approval.
This [content / article] contains general information about the American Express® Business Line of Credit installment loan type only.

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Frequently Asked Questions (FAQs)

Is it hard to get a business loan?

It can be hard to get a business loan. In 2019, about two-thirds of business owners who applied for a business loan were approved. If you’ve been running a solid, profit-generating business for many years with little or no debt and have an excellent credit score, it’ll likely be straightforward to get approved for a business loan. On the other hand, it’s often much harder to get approved if your business is newer, your credit is poor or you have inconsistent profits.

How long does it take to get a business loan?

How long it takes to get your loan depends on the lender. Typically, it can take at least several weeks to get funding from traditional small business lenders. Some online small business lenders offer funding within days, although they typically charge much higher rates.

Can I get a business loan with my EIN number?

Whether you can get a business loan with your employer identification number depends on the lender’s loan application requirements. Some lenders allow you to apply for a small business loan with just an EIN, while others require your Social Security number as well.

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Jerry Brown is a personal finance writer based in Baton Rouge, La. He’s been writing about personal finance for three years. Financial products he enjoys covering include credit cards, personal loans, and mortgages.

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