Understanding a lender's requirements before you apply for a small-business loan can help set you up for success.
Randa KrissWriter | Small business, business banking, business loans
Randa Kriss is a small-business writer who joined NerdWallet in 2020. She previously worked as a writer at Fundera, covering a wide variety of small-business topics including banking and loan products. Her work has been featured by The Washington Post, The Associated Press and Nasdaq, among others. Randa earned a bachelor's degree in English and Spanish at Iona College.
Lisa A. AnthonyLisa Anthony is a former NerdWallet writer covering small-business. Before Nerdwallet, she had more than 20 years of experience in banking and finance.
Last updated on March 26, 2024 Sally LaucknerSally Lauckner has over a decade of experience in print and online journalism. Before joining NerdWallet, Sally was the editorial director at Fundera, where she built and led a team focused on small-business content. Her prior experience includes two years as a senior editor at SmartAsset, where she edited a wide range of personal finance content, and five years at the AOL Huffington Post Media Group, where she held a variety of editorial roles. She has a master's in journalism from New York University and a bachelor's in English and history from Columbia University. Email: slauckner@nerdwallet.com.
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Finding and applying for a small-business loan can be time-consuming. By knowing lenders' typical business loan requirements ahead of time, you can streamline the process and avoid potential frustration.
Here are seven things lenders generally look at to decide whether you qualify for a loan.We’ll start with a brief questionnaire to better understand the unique needs of your business.
Once we uncover your personalized matches, our team will consult you on the process moving forward.
You’ll likely need good personal credit (typically a score of 690 or higher) or excellent business credit to qualify for a government-backed SBA loan or traditional bank small-business loan.
Online lenders, on the other hand, can be more lenient with credit scores, emphasizing your business’s cash flow and track record instead. Some online lenders and nonprofit organizations offer business loans for bad credit and will accept a minimum personal credit score as low as 500.
Personal credit scores indicate your ability to repay personal debts, such as credit cards, car loans and mortgages. Small-business lenders require a personal credit check because they want to see how you manage debt.
FICO scores, commonly used in lending decisions, range from 300 to 850 (the higher, the better). You can get a free credit score on NerdWallet and a free copy of your credit reports at AnnualCreditReport.com.
Fast ways to build your personal credit include disputing any inaccuracies in your report and paying bills on time and in full.
More-established companies will have business credit scores (which generally range from 0 or 1 to 100) with credit bureaus such as Experian, Equifax and Dun & Bradstreet. Steps to building business credit include opening a business bank account, establishing trade lines and keeping public records clean.
Many lenders will only consider businesses that bring in at least a minimum monthly or annual revenue. Lenders look at your revenue to make sure that you have enough cash flow to afford your loan.
How much cash flow you’ll need depends on the individual lender — for example, online lender OnDeck requires $100,000 in annual revenue to qualify for its line of credit, while Bank of America’s minimum is $250,000 for its secured business loans.
If you don’t meet lender requirements for a business loan with low revenue, you’ll likely have to rely on alternative financing options, like invoice factoring.
A similar financial metric your lender may consider is your debt service coverage ratio (also known as DSCR). This ratio compares your available operating income to your current debt obligations. To calculate your DSCR, you divide your annual operating income by your total annual debt payments.
For example, if your annual income is $150,000 and your total debt payments are $100,000, your debt service coverage ratio would be 1.5. Generally, lenders want to see a ratio higher than 1, typically a minimum of 1.25, as this indicates that your cash flow is sufficient to cover your debt obligations.
Lenders use your time in business as a quick measure of success. The longer you’ve been operating, the more likely you are to have money to repay your debts.
To qualify for a business loan from a bank, you’ll typically need to have been in business for at least two years. Online business loans tend to have less stringent requirements but still usually require at least six months in business.
Every industry has a different risk level — and some industries, like restaurants and beauty services, can be considered high risk because they’re more likely to have inconsistent revenue.
There are also certain industries that many lenders don’t work with at all. These typically include adult entertainment, drug dispensaries or products, gambling and money service businesses.
Government-backed loans from the U.S. Small Business Administration have specific size and industry criteria, among other unique requirements. If you want to qualify for SBA loans, you’ll need:
SBA loan requirements Your business must meet the SBA's definition of a "small" business, which varies by industry. You must be a for-profit company.You can’t operate in an ineligible industry, like real estate investing, gambling or political lobbying activities.
You must be current on all government loans with no past defaults — you’ll be disqualified if you’ve been late (you haven’t paid within 90 days of the due date) on a federal student loan or government-backed mortgage, for instance.
Lenders will want to know how you plan to use the money and see that you have a strong ability to repay. They may require a business plan that explains what your business goals are and how you plan to reach them. Some lenders may also ask for a business loan proposal, which details the purpose of the loan and how you expect to repay it.
These documents should clearly demonstrate that you will have enough cash flow to cover ongoing business expenses and the new loan payments. This can give the lender more confidence in your business, increasing your chances at loan approval. On the other hand, if you’re a new business that doesn’t have existing revenue to show a lender, a thorough business plan can help convince it that you will be successful in the future.
Use NerdWallet’s business loan calculator to estimate your monthly loan payments:Estimate payments to understand the cost of a business loan
Payment Breakdown Amortization ScheduleOver the course of the loan, expect to pay
Total principal Total interest Total principal & interest| Payment date | Principal | Interest | Balance |
|---|---|---|---|
| Today | $0 | $0 | $0.00 |
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To qualify for a small-business loan, you may have to provide collateral to back the loan. Business collateral is an asset, such as equipment, real estate or inventory, that can be seized and sold by the lender if you can’t make your payments. This is a way lenders can recover their money if your business defaults on the loan.
For example, SBA 7(a) loans above $50,000 typically require collateral plus a personal guarantee from every owner of 20% or more of the business. A business loan personal guarantee requires you to repay the amount owed from your personal assets if the business can’t.
Some lenders offer unsecured business loans, which don’t require physical collateral but will likely still come with a personal guarantee. Lenders may also take out a blanket lien on your business assets — essentially another form of security — giving the lender the right to take business assets (real estate, inventory, equipment) to recoup an unpaid loan.
Each lender has its own rules, so ask questions if you're unsure what's required.Banks and other traditional lenders typically require a wide range of paperwork when you apply for a small-business loan. The financial and legal documents you may need for a small-business loan include:
Personal and business income tax returns. Financial documents, such as profit and loss statements, balance sheets and cash flow statements. Personal and business bank statements. A photo of your driver’s license. Commercial leases. Business licenses. Articles of incorporation. Proof of collateral. Business plan. Existing debt schedule, if applicable. Legal contracts and agreements. A resume that shows relevant management or business experience. Financial projections if you have a limited operating history.Online lenders may provide a streamlined application process with fewer documents and faster underwriting.
When completing your business loan application, it’s important to double check that your documentation is accurate and up to date. Not only will this speed up the funding process, but it can also help prevent automatic rejections. If a lender is using automated underwriting and you input incorrect information, it can result in an automatic rejection — even if you’re qualified.
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If you have multiple years in business and strong credit: Check out the best banks for small-business loans.
If you can't qualify for a bank loan, but still have good credentials: Learn more about the best SBA lenders.
If you're a newer business or have a lower credit score: Online business loans may be a good option to consider.
Although business loan requirements vary from lender to lender, you’ll generally need good credit, strong finances and an established business history to qualify for a loan. Traditional lenders typically have the strictest requirements, whereas online lenders are more flexible.
What do banks require for a small-business loan?Banks generally require that you have good to excellent credit (score of 690 or higher), strong finances and at least two years in business to qualify for a loan. They’ll likely require collateral and a personal guarantee as well.
You’ll typically need to provide detailed paperwork as part of your application — and some banks will require you to apply in person.
What are the documents required for a business loan?Each lender will have unique documentation requirements, but at the very least, you’ll likely need to provide:
Business and personal bank statements. Business and personal tax returns. Financial statements, like balance sheets and income statements. Traditional lenders typically require more paperwork than online lenders. Former NerdWallet writer Steve Nicastro contributed to this article. About the author:Randa Kriss is a lead writer and NerdWallet authority on small business. She has nearly a decade of experience in digital content. Prior to joining NerdWallet in 2020, Randa worked as a writer at Fundera, covering a wide variety of small-business topics and specializing in the lending and banking spaces. Her work has been featured in The Washington Post, The Associated Press, MarketWatch and Nasdaq, among other publications. She has also hosted a webinar as part of the SBA's 2024 National Small Business Week Virtual Summit. Randa is passionate about helping small-business owners make educated financial decisions, especially when it comes to affordable funding. She is based in Chicago.
Lisa A. Anthony is a former lead writer on NerdWallet’s small-business team, primarily covering small-business lending. She has over 20 years of diverse experience in finance, lending and taxes. Prior to joining NerdWallet, Lisa worked as a writer for Intuit Turbo Tax, loan officer for Bank of America and a business analyst for Wells Fargo Home Mortgage. Over the years, she has had the opportunity to interact directly with consumers on lending products and tax preparation software. Her work has appeared in The Associated Press, Washington Post and Entrepreneur, among other publications.
On a similar note.10 Types of Business Loans
Business Credit Scores: What They Are, Where to Get Yours
How to Apply for and Get a Business Loan in 6 Steps
A business line of credit gives you access to a set amount of capital that you can draw from as needed. You only pay interest on the funds you draw.
Use NerdWallet’s business loan calculator to estimate monthly principal and interest costs based on the loan amount, loan term and APR.
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