Getting a small business loan can be overwhelming and, at times, frustrating. Understand what’s required to qualify for a business loan to make the process of applying, and getting, business financing easier.

Most small business financing is based on three main qualifications: revenues, credit and time in business. Depending on the lender and the type of financing, however, there may be additional qualifications including industry, collateral, business plan, financials and more. 

Small Business Loan Requirements

Three main factors are almost always considered in some way by small business lenders: 

1. Revenues

Here lenders want to understand whether the business has sufficient cash flow to repay the loan or financing. Some lenders have minimum annual revenue requirements (for example, $120,000 a year in income) while others may require average monthly revenues for the past 3-6 months (for example, $10,000 per month on average). 

To verify revenues, lenders will often want to see business bank statements. Be prepared to either provide copies or to link your bank account during the application process so the lender can access that information directly from your bank.  

Some lenders, especially traditional lenders like banks, will also require business tax returns and may even require personal income tax returns. When tax returns are required, most lenders want to see copies from the last 2-3 years. 

Financial statements may be required as well. Banks, including those who make SBA loans guaranteed by the U.S. Small Business Administration, may require up-to-date financial statements, such as a balance sheet, income statement or year-to-date profit and loss statement. Financial projections may be required as well. 

If your business invoices other businesses, you may be eligible for invoice financing. In that case, you may need to provide an accounts receivable aging report or A/R report. Your accounting professional can help you run this report if needed. 

2. Credit 

Here lenders want to understand how the applicant has managed debt in the past. Some lenders check personal credit reports or credit scores, some lenders check business credit reports and some may check both. (A few lenders don’t check credit at all, but this is the exception rather than the rule.) 

Personal Credit

Not all small business financing options require good credit, but many do check personal credit scores from one of the three major credit bureaus. Traditional lenders such as banks often require a minimum FICO score of 680—700. Online lenders may have more lenient requirements and may offer financing to those with credit scores in the low-to-mid 600s. Some types of financing are available to those with bad credit (generally below 620-650). 

The initial credit check is often a soft credit check, which does not impact personal credit scores. However, if you decide to fill out the full loan application there may be a hard credit check which can result in a drop of roughly 3-7 points. 

Business Credit

Some lenders will check business credit. They may review credit reports from commercial credit bureaus such as Dun & Bradstreet, Equifax or Experian. Many times they are looking for red flags such as excessive UCC filings, collection accounts, or judgments. Other times they will check business credit scores. 

3. Time in Business

When you fill out a small business loan application, you’ll be asked when the business opened. That’s because most lenders have a minimum time in business requirement. Some require a minimum of two years in business, while others will provide financing to younger businesses, and even start ups. 

If you have a new business, your options will be more limited. Startup loans are harder to find, but they do exist. You may have to provide information to convince the lender you will be able to repay the loan. That may include a business plan or even documentation such as a resume confirming experience successfully starting other businesses, or have a track record in your industry. 

If your business is incorporated (LLC, S Corp or C Corp), you can use the incorporation date as your start date. Otherwise you may have to use the date you obtained your business license or obtained your Employer Identification Number (EIN). 

Industry

The type of business you’re in matters as well. Businesses are categorized using NAICS or SIC codes. These are government codes that indicate the industry in which the business operates. Some types of businesses are hard to fund, period. Cannabis or gambling businesses are two examples. 

Others may be considered risky by some lenders but perfectly acceptable to others. Real estate, restaurants or retail shops are examples. Some lenders will provide financing to borrowers with those types of businesses, while others won’t touch them.

Collateral 

Collateral is something tangible pledged to secure the loan. It can include heavy equipment, real estate, inventory or even future receivables. It can even extend to personal assets like home equity. Not all business loans require collateral. In the case of SBA loans, the SBA will require collateral to be pledged if available, but lenders can’t reject loan applications simply because the business owner does not have collateral. 

Equipment financing by its nature involves collateral: you pledge the equipment you are financing. Because the financing is backed by collateral, interest rates are often lower than an unsecured loan with no collateral. 

Loan Amount

The amount of financing you seek will also determine what you need to qualify. A million dollar term loan will require significantly more documentation than a $10,000 microloan, for example. The larger the loan, the more scrutiny there will be. 

Building a Strong Business Plan

Most lenders don’t require a business plan to qualify for financing, but creating one is still helpful if you want to qualify for financing. Here’s why. A business plan can help you clearly define why you need financing, and how you’ll use that money to help your business grow. 

It’s also worth noting that some types of funding may require a business plan. These may include investor funding, certain traditional bank loans, or loans from credit unions, as well as some types of crowdfunding. 

Defining Your Business Goals

One of the essential steps in creating a business plan is clearly defining your business goals. How will your business make money? What is your business model? How will you deploy capital if you get funding? These are questions that should be answered in your business plan. 

Conducting Market Research

Your target market is another essential part of your business plan. It can be hard to get customers if you don’t have a clear idea of your target market. There are many free resources that can help you clearly identify your target market, including research from the U.S. Census Bureau. 

Crafting a Comprehensive Business Plan

Business plans can be simple or complex. There are numerous resources you can use to create your business plan. Entrepreneurs who want help with their business plan can take advantage of free and low cost counseling services through SBA Resource partners such as SCORE or Small Business Development Centers (SBDCs). 

Choosing the Right Lender and Loan Type

One way to help your business qualify for the right type of loan is to find the right type of loan based on both your business needs and your qualifications. 

For example, if you have low personal credit scores, qualifying for a bank loan or SBA loan will be difficult. But you may be able to get a microloan, business cash advance, invoice financing, vendor financing or crowdfunding since those options typically don’t require high credit scores. 

If you then consider your business needs,  you may determine that invoice factoring and vendor financing aren’t a great fit if you need a longer repayment period, since those types of financing are best for short-term borrowing. But if you need short-term working capital financing, those options could work out well. 

Exploring Various Loan Options

Here’s a quick list of the most popular types of financing and typical basic qualifications:

Type of financing	Credit Requirements	Time in Business	Revenues
Business credit cards	Good to excellent personal credit	N/A	Can qualify with personal income, not just business
Business line of credit	Good to excellent personal credit	1-2+ years	Minimum annual revenues required
Business term loan	Good to excellent personal credit	1-2+ years	Minimum annual revenues required
Microloan	Fair to good personal credit	Varies	Personal income often considered
SBA loans	Good to excellent personal credit	Startups may qualify	Income must be sufficient to pay the loan. Projected income acceptable.
Vendor terms	May check business credit	Startups may qualify	Must be able to repay financing
Invoice factoring	Borrower typically doesn’t need good credit	Flexible, must have B2B invoices	B2B invoices required
Merchant cash advance	Fair or poor credit often acceptable	1+ years	Must have sufficient sales to support advance
Crowdfunding	Credit rarely checked	Startups may qualify	Not required for most types

Researching Different Lenders

There are thousands of small business lenders in the US. They can range from local non-profit Community Development Financial Institutions and local banks or credit unions, to large national lenders that serve borrowers around the country.

If you’re feeling overwhelmed by those options, Nav can help. View your top financial options from 160+ trusted loans and credit cards based on your business data.

Financing Checklist 

To prepare for financing, it can be helpful to gather the following information. Not all of it will be required, but having this information at your fingertips can make applying easier and faster. 

Personal Information: 

• Current driver’s license or passport for proof of identity
• Personal tax returns

Business Information: 

• Most recent two years business tax returns (if available)
• Most recent six months of business bank statements
• Business license (if required) 
• Articles of incorporation
• Verification of address
• Voided check (for ACH or direct deposit) 
• Franchise agreement/UFOC (if applicable) 
• Commercial lease (if your business leases property) 
• Business plan (for bank loan or SBA loans) 

FAQs

How can I qualify for a business credit card?

Most small business credit cards base their decision on the owner’s personal credit scores and income from all sources (not just business revenues). That means these cards may be available to small business owners with startups. Most credit cards require good credit, with minimum credit scores of at least 650 and often higher. 

How can I qualify for a line of credit?

A business line of credit can be an excellent choice for flexible, short-term financing. Bank lines of credit may have more stringent eligibility requirements, and will often require good to excellent credit. Online lenders may be more flexible but the interest rate will usually be somewhat higher.  

How can I qualify for a SBA loan?

Most SBA loans are made by lenders approved by the SBA. (The exception is Disaster Loans, including EIDL, which are made directly by the U.S. Small Business Administration.) There are over ten types of SBA loans, and eligibility standards vary, but generally to qualify, you must have a for-profit small business business doing business in in the U.S., good credit, and have made a reasonable investment (equity injection) into the business. 

Learn more about SBA loans and how to qualify here. 

Is a personal guarantee required for a small business loan?

If a lender checks your personal credit, you will want to understand if that is because it requires a personal guarantee. When you give a personal guarantee, that means the lender can try to collect from you personally if the business fails to repay the loan. 

What are the easiest small business loans to qualify for?

Online loans are generally easier to get than bank loans or SBA loans. Decisions can be made very quickly. In addition, it’s important to identify what’s standing in the way of loan approval.

If you have poor credit or bad credit, you may want to at least check out the following types of business loans:

• Merchant cash advances
• Business cash advances
• Invoice financing
• Equipment financing
• Microloans 
• Supplier or vendor financing 
• Crowdfunding

If you have a new business, you may want to consider:

• Business credit cards
• Equipment financing
• Microloans 
• Supplier or vendor financing 
• Crowdfunding

What are the common reasons for loan rejections?

Business loan applications are often rejected due to credit, income, time in business and the other factors discussed here. Each lender has its own standards, so reasons for declining applications can vary by lender or by loan type. 

Should I consider alternative financing options?

If, like many business owners, you are having trouble qualifying for a traditional small business loan, you may want to consider alternative loan programs. Some may carry higher costs, though, so make sure you understand how you’ll use the money you borrow to make money. 

What steps can I take if my loan application gets rejected?

If your loan is turned down, ask why. Business lenders aren’t always required to disclose why they rejected a small business loan application but if you ask questions you may be able to get insights into why yours was rejected. Try to understand whether those reasons are specific to that particular lender, or if you need to take steps to shore up your qualifications generally. 

For example, a bank may not lend to businesses in a certain industry. That’s very different than if you are trying to get a loan but you have bad credit. In the latter case, you’ll need to try to work on your credit while you look for more flexible lenders to help with your immediate need for capital.