Business Loan Requirements

A guide to business loan requirements: what you need to qualify for small business funding options

Currently, there are so many loan options available to small business owners. This makes it confusing for businesses owners to find the best product to meet their needs. To ensure that you get the best product to meet your business needs, going through the different types of loan options should be the initial step in your search. The next step is to get prepared for the application process. But even before starting out with the application, you should first be aware of the business loan requirements. These requirements tend to vary depending on the type of loan you are applying for and the lender you decide to work with. If you are a start-up, you may have limited options available. But being aware of the loan requirements during your search is also important. Before approving the loan, there are several things that most lenders consider including the business credit history and whether you are a risky borrower. If you have been in business for only a few months, it will reduce your chances of getting affordable business loans. Lenders assume that businesses that have been in operation for a longer period have higher chances of surviving, and are likely to repay the loan on time. This comes as bad news to businesses that are yet to get off the ground and need financial aid.

Business Loan Requirements

A complete guide on business loan requirements

That said, there are only a few loan options available to new businesses compared to the established ones. Small business loan requirements can also vary greatly depending on the type of business loan you want to apply. You may have asked yourself before, what do you need to qualify for small business financing? If you are a new business, the answer may not be that simple. In fact, it is almost impossible for startups to access a loan in traditional lending institutions. Luckily, there are online lenders who can approve you for a loan if you meet certain requirements. If you are considering taking out a small business loan in the near future, it is important to first know the requirements of the loan. Generally, your business has to meet certain requirements to qualify for funding.

Types of small business loans available

As a reminder, business loan requirements vary depending on the type of loan you are applying for. Due to these variations, it is important to go through the requirements from different lenders and find one who offers flexibility. There are five main types of small business loans that are available for both startup and established businesses. These include:

  • SBA loans
  • Invoice financing
  • Lines of credit
  • Equipment financing
  • Short-term loans

It is actually easier to qualify for any of the above loan options; let’s take a look at the different loan requirements available under these categories.

SBA loan requirements

Small Business Administration, SBA loans are offered to both starts and established businesses. There are different types of SBA loans available to small business owners and all of them have varied requirements depending on the loan amount and how you intend to use the funds. However, the following requirements cut across the board;

  • You should have a credit score of at least 680
  • No bankruptcies, tax liens or foreclosure
  • Most lenders will also require you to provide collateral
  • A down payment of at least 10% is required for equipment financing

For startups to qualify for an SBA loan, they should prove to the lender that they have sufficient industry experience and have a strong business plan. Some lenders may also need financial projections for the next 3-5 years.

Loan requirements for lines of credit

This type of small business financing is available for any type of business. With this option, the business is approved for a lump sum amount that you can draw from when you need short-term funding. Let’s see an example of how lines of credit work.

For instance, you need to buy inventory worth $3,000, but do not have sufficient funds, maybe because clients are taking longer to pay their invoice. If your business is approved for a line of credit of $10,000, then you can draw the $3,000 which can be repaid gradually over the term length of the loan. This reduces the amount to $7,000. But once you pay, the line of credit will go back to the initial $10,000.

Even if you have a new business and do not require funding right away, you will be prepared for any financial issues by getting a line of credit. But what does it take to qualify for this small business funding option?

Most lenders will require you to meet the following qualifications to be approved for a line of credit

  • You should be in business for at least 6 months. If your business is less than 6 months old, you should take more time before you consider applying for a line of credit.
  • Your business should generate an annual revenue of at least $50,000

The following documents may also be required during the underwriting stage:

  • Bank statements
  • Driver’s license
  • Profit and loss statements
  • Balance sheet
  • Voided business check
  • Personal and business tax returns

Some lenders will also require you to have a good personal credit score to be approved, buy these requirements also vary from one lender to another

Requirements for invoice factoring

This is also another type of small business financing that has flexible requirements, making it easier for small businesses to qualify. With this option, you can get short-term funding by issuing your outstanding customer invoices as collateral. So how does invoice factoring work?

Invoice financing is a secured type of small business funding since your customers’ invoices are issued to a financing company as guarantee for payment. The company, referred to as a factor provides the business with an advance rate of up to 90% of the total invoice amount. Interest is charged depending on the number of weeks it takes for customers to pay the invoices. Once the customers pay, the factor deducts the total fees from the remaining amount and forwards the rest to you. Your business needs to meet the following criteria to qualify for invoice factoring:

  • You should be in business for at least 6 months
  • Generate an annual revenue of $50,000+

The following documents will also be required;

  • Bank statements
  • Voided business check
  • Outstanding invoices

Just like lines of credit, business owners with good credit have higher chances of qualifying for invoice factoring. Invoice financing is among the best funding options for small businesses. Since the funds are meant to cover short-term expenses, you won’t have to worry about repaying the loan for years. Provided you have trustworthy customers, this can be a good borrowing option for your business.

Equipment financing

This is also a type of secured loan where the equipment you want to purchase acts as collateral. Just as the name suggests, the loans are specifically designed for small businesses to purchase equipment. Compared to lines of credit and invoice financing, these types of loans are long-term in nature, and it may also be difficult for new businesses to qualify. This is because the lender requires you to be in business for a longer time. You need to meet the following requirements to qualify for equipment financing;

  • You should be in business for at least 11 months. This period can be more depending on the lender you work with
  • Most lenders will require you to have a minimum credit score of 600
  • Your business should generate an annual revenue of $100,000 to be eligible for funding.

This type of loan also requires lots of paperwork and the following documents may be needed:

  • Bank statements
  • A voided business check
  • Business tax returns
  • Equipment quote

Just like the above loan options, having good credit will increase your chances of getting the loan approved. The requirements also vary from one lender to another.

Requirements for short-term business loans

It is easier to qualify for short-term loans since most of them do not have stringent requirements. The loans work the same way as traditional term loans. With this financing option, the business is approved for a lump sum that needs to be repaid back with interest. Most short-term loans have a term of between 3 and 18 months. The maximum loan amount is also less compared to term loans making them less ideal for certain types of businesses. All the same, it is much easier for startups to be approved for short-term loans compared to other lending options. To qualify:

  • You should be in business for at least one year
  • Have a personal credit score of 525+
  • Your business should generate an annual revenue of at least $50,000.

The following documents will be needed when applying for short-term loans;

  • Bank statements
  • Proof of ownership
  • A voided business check
  • Personal tax returns
  • Driver’s license

As usually, borrowers with good credit score can easily qualify for funding;

Other small business lending options

After going through all the above requirements, you may still have problems acquiring a small business loan, and especially when your business is still new. If you need immediate funding and your business is not old enough to qualify for any of the above lending options, business credit cards can be a good solution for you; it is actually easier to qualify since credit card issuers consider individual credit scores and not the business history for you to be approved. Rather than worrying about your business financial history, you should focus more on improving your personal credit to qualify for a business credit card.

The bottom line

Now that you already know what it takes to qualify for small business funding, the next step is to start the loan application process. Once you have all the required documents in order, you should first ensure that all the lender requirements are met before applying. This will increase your chances of being approved for the funds. Apart from traditional lenders that require too much of pen and paper applications, you can easily apply and upload all the documents online if you work with alternative lenders. Ensure that all the questions are correctly answered and provided all the required information for the process to go much faster and smoother. The good news is that no matter the size or age of your business, you can always meet requirements for certain lenders.

Latest posts by George Paunov (see all)

Get Started Now!

By clicking on "Get Started!", I agree to the Terms of Use, Privacy Policy and ESIGN Consent