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Seven Common Requirements For A Business Loan

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Explore the seven common requirements to secure a business loan and discover the alternative lending options you can try to get funding.

May 15, 2024
Author: NCH

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Getting financing is one of the major challenges an entrepreneur faces. Whether for launching a new startup or expanding a growing venture, securing capital can be difficult, especially when you don’t know where to start. 

Fortunately, you can get financing for your business in different ways, one of which is through a business loan. 

Business loans are popular for their flexibility and accessibility. However, applying for them can be time-consuming. You’ll have to fulfill several requirements before you can qualify for one. 

To make the process much easier, we’ve listed down the seven most common requirements for a business loan:

Seven Common Requirements For A Business Loan

Truthfully, the criteria and requirements for business loans vary depending on the lender who offers them. But typically, they look for the following:

Business & Financial Document

The first requirement for business loans is your business and financial documents, such as:

  • Personal and business income tax returns.
  • Financial statements include balance sheets, cash flow, and profit and loss statements. 
  • Personal and business bank statements.
  • Employer Identification Number (EIN).
  • Business license.
  • Articles of incorporation.
  • Accounts payable and receivable.
  • Debt schedule, if applicable.
  • Legal contracts and agreements.
  • Ownership and affiliations.

We suggest you contact your potential lenders for a complete list of all their required documents before you apply for a loan. 

Personal & Business Credit Scores 

Banks use personal and business credit scores to gauge a person’s or organization’s creditworthiness. Credit scores indicate a person’s ability to repay debts on time and determine their credit risk. 

Most lenders use FICO scores as the basis of their lending decisions. This score ranges from 300 to 850. The higher your score is, the more financially responsible you are perceived to be. 

A good credit score increases your chances of qualifying for loans and getting more favorable terms, such as lower interest rates and higher credit limits. 

Federal and traditional small business loans typically require a FICO score of 690 or higher. However, some lenders are more lenient with credit scores.

Annual Revenue

Lenders typically require a minimum annual or monthly revenue to determine whether your cash flow can sustain your loan. 

Your chosen lender will determine how much income you need to qualify for a business loan. For example, Bank of America requires a minimum annual revenue of $250,000 for its secured business loans. 

Lenders use annual revenue and the debt-to-income (DTI) ratio to determine whether a business can afford a loan. 

Your business’s DTI ratio measures how much its earnings will go toward paying off its debts. It indicates whether your business can afford an additional loan. 

You can calculate your DTI ratio by dividing your annual debt payments by your gross income. For instance, if your annual profit is around $150,000 and your debt payments are $100,000, your DTI ratio is 1.5. 

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The higher the ratio, the greater the risk of a potential borrower. Lenders typically look for a ratio higher than 1 or a minimum of 1.25. This rate indicates that your cash flow is enough to cover your financial obligations.

Business Tenure

Businesses operating longer have a greater chance of getting their loans approved. While the minimum requirement varies depending on the lender and the type of loan, traditional lenders typically require borrowers to have been in business for at least two years. 

Industry & Size

Besides revenue and years in business, lenders also consider the borrower’s industry and size in their lending decisions. 

Some industries, such as restaurants and beauty services, are considered high risk because they are more likely to have fluctuating revenue. In addition, some lenders also don’t work with companies in the following industries:

  • Adult entertainment
  • Drug dispensaries/products
  • Gambling and other money service businesses

US Small Business Administration loans also have specific size requirements, which vary depending on the industry. 

Business Plans & Loan Proposals

Lenders typically require startups to submit their business plans as part of their business loan requirements. These documents should demonstrate your goals and how you plan to achieve them. Aside from this, it should also include the following:

  • Financial projections
  • Industry outlook
  • Competitive analysis

Other banks may also ask you to provide a business loan proposal outlining how you want to use the borrowed money and how you plan to repay it.

Collateral 

There are two types of business loans in the market: secured and unsecured. If you apply for a secured loan, the lender will require you to provide collateral as security if you fail to repay your debts. 

A collateral can be anything of value, such as accounts receivables, properties, and equipment, that the lender can seize if the borrower defaults on their loan. 

For instance, 7(a) SBA loans above $50,000 require collateral and a personal guarantee from business owners. Personal guarantees require you, the business owner, to repay your company’s debts if it defaults. 

How Difficult is it to Get a Small Business Loan?

The difficulty level of getting a small business loan varies depending on the type of loan you’re applying for and the lenders’ criteria. Some loan types are harder to secure than others, but the good news is there are several alternative lending options you can try out, such as:

  • Business Lines of Credit: Lines of credit give businesses a pre-approved amount ranging from $1,000 to $250,000 that they can use as needed. Their average interest rates range from 4% to 60%.
  • Peer-to-peer (P2P) Lending: In P2P lending, you take out loans from individual investors instead of banks and other traditional lenders. The payment terms for these loans are much shorter than those of traditional banks. They also have lower interest rates, ranging from 6% to 36%.
  • Equipment financing: Equipment financing allows businesses to pay for specific equipment over time. The equipment vendor or manufacturer typically secures these loans through their in-house financing services or with the help of a partner lender. This lending option is ideal if you need capital to acquire equipment for your operations. 

Get Help Securing a Business Loan Today

Ultimately, the key to obtaining financing for your business lies in understanding what lenders look for in a potential borrower. By learning some of the most common requirements for business loans, you’ll have a much easier time navigating the application process and positioning your business as a creditworthy organization. 

Don’t let the complexity of business loans stop you from getting the financing your business needs. Contact NCH today and get help securing a business loan. 

Find out how our business specialists can help you by visiting our website here or call us at 1-800-508-1729 to schedule a consultation with one of our experts. 

 Disclaimer: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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