7 Small Business Loan Requirements That You Need to Know

Lenders can review market conditions in a specific industry or location as part of their risk assessment of your loan. Sectors experiencing consistent growth can reflect positively on your application as it could mean a greater likelihood that your company will continue expanding. Those experiencing a decline, on the other hand, could tell lenders that your company’s growth opportunities may be limited.

Nuances of your company’s products and services can also be incorporated into a lender’s requirements. For example, cannabis products are deemed ineligible for financing by many lenders as it’s currently not considered legal at the federal level. Loans insured by the federal government, such as the Small Business Administration (SBA), will therefore be unlikely to issue funding.

Companies with fewer than two years in business are generally considered as startups. Since startups statistically have a high failure rate, lenders may require a minimum length of time in business to consider you eligible for a small business loan. Lenders with flexible requirements here may charge higher rates or fees to account for the increased risk of default.

A business plan is a document that outlines various aspects of your company. Most business plans include information about your company’s finances, descriptions of products and services, revenue and growth projections, competitor analysis, and marketing strategies.

They can be especially important if you are a startup company seeking financing. Without a long sales track record, they can give a lender more insight into why your business will succeed, and why it should lend you money. SBA loans are a loan type that commonly requires a business plan as part of the loan application process.

Our related resources:

You must be able to show that your business is operating legally to get a small business loan. These items can vary based on your location, as different states, cities, and counties may have varying requirements to conduct business activities. Common documents you may be asked to provide can include:

• Professional licenses or certifications
• Corporate bylaws
• Franchise agreements
• Partnership agreements
• Limited liability company (LLC) operating agreement
• Articles of incorporation

A FICO score is the most common personal credit score used by lenders. According to Fair Isaac Corporation, this is the credit score model used by 90% of the top lenders. FICO scores typically range from a low of 300 to a high of 850. Scores are determined based on things like your payment history, amount of debt, length of your credit history, mix of credit, and new credit you’ve obtained.

Lenders often pull data from the three major credit bureaus, e.g., Equifax, Experian, and Transunion, and due to variations in the data kept by each of the bureaus, it’s common for each to produce a different FICO credit score.

Credit scores can generally be categorized as good or bad based on the following scoring bands:

The Dun & Bradstreet PAYDEX score is the most commonly used scoring model for business credit. Scores run from a low of zero to a high of 100 and are generally regarded as good or bad based on the following scoring bands:

Other scoring models include Experian Intelliscore and the FICO Small Business Scoring Service (SBSS), which are sometimes used for SBA loans.

Some lenders may not issue additional financing if they deem your business has excessive debt. Your credit reports are a primary source of information regarding your business liabilities. Items that may not appear on credit, but are still often factored into this analysis, can include the following:

• Lease payment for office locations
• Recently obtained debt not yet being reported to your credit reports
• Contracts with suppliers or vendors

Regardless of the strength of your credit and finances, some lenders may require your company to have a minimum amount of sales to be eligible for financing. This is often noted as a minimum annual revenue figure, with eligibility dependent on verifying your company’s financial statements.

Lenders may also consider the trend of your income, whether it has been increasing, declining, or remaining steady. Businesses with a decline in income may still be eligible for financing if it is sufficient to pay their debt obligations. However, documentation may be needed to determine whether the income has since stabilized or is expected to continue dropping.

Depending on your business debt obligations, you may need to meet certain income thresholds to be eligible for a loan. Lenders commonly evaluate this by calculating your debt-to-income (DTI) and debt service coverage ratios (DSCR). However, there is also a wide range of other financial and liquidity ratios that can be used depending on the type of loan you’re getting.

If collateral is pledged for a loan, your lender will typically need to complete an appraisal to determine its value and condition. These are items that can affect not only your ability to get financing but also the rates and terms you are offered.

As part of the appraisal process, different factors will be considered depending on the type of collateral. For example, real estate loans may look at purchase prices of comparable properties that have recently sold, seller concessions, and geographical locations. Vehicle loans, on the other hand, may prioritize things like mileage and model year.

The appraised value of your loan’s collateral will often determine the maximum loan amount you’re eligible to get, and by extension, the down payment you must have. You can make this determination by using our borrowing base calculator, which tells you how much you can potentially borrow based on a lender’s guidelines.

If you have collateral that depreciates quickly, lenders might use the collateral coverage ratio. This ratio considers an asset’s decline in value due to normal use and other factors.

Other common ratios that can be evaluated include:

• Loan-to-value (LTV) ratio: This measures the amount of equity you have in collateral by dividing your loan amount by the appraised value of the item in question. LTV is commonly used for real estate loans and equipment financing.
• Loan-to-cost (LTC) ratio: This is often used for properties needing repairs or renovations. It compares the loan amount to the total cost of completing construction on the property.
• After-repair value (ARV): Often used in conjunction with the LTC ratio, ARV measures the value of a property once repairs, upgrades, and construction on a property have been completed.

When collateral is being pledged for a loan, lenders often use a UCC filing to create a lien. Liens can be found via public records and serve as a notification to other creditors that another lender has a security interest in the collateral in question. Filing a lien also protects the lender, as ownership cannot be transferred without the loan balance first being paid in full.

Lenders may have certain thresholds for minimum and maximum loan amounts that can be issued. The same is true for loan terms. If the lender you’re seeking financing from does not offer the amount or length of financing you need, check if it’s specific to that loan program or if it’s only a limitation of the lender.

Banks and credit unions often offer a wider range of loan options, but you can also consider one of the best business loan brokers and online lenders for alternatives. The loan amount and repayment term you choose will also impact your approval odds. These both affect your required loan payment amount, and lenders may be unwilling to issue you financing if they deem the minimum payment too high relative to your income.

Loans are commonly structured to have payments made monthly. However, some loans may also have daily, weekly, biweekly, or seasonally adjusted payment options.

Loans can also be structured such that payments cover various portions of the principal balance and accrued interest. Some examples include the following:

• Fully amortized loan payments:With a fully amortized loan, each payment covers a portion of the principal balance and accrued interest such that the loan balance will be fully paid off at the end of the loan term.
• Interest-only payments: Interest-only payments on a loan only cover the accrued interest charges. The principal balance of the loan remains unchanged, but this can help you qualify since your loan payments will be lower than a fully amortized loan.
• Balloon payment: With a balloon payment, you’ll be required to make a lump-sum payment to fully satisfy the loan balance after a specified period.

Loan programs that offer a variable interest rate typically have a lower starting rate than the equivalent fixed-rate option. However, while your initial starting payments may be lower on a variable-rate loan, it might be more difficult to get since some lenders qualify you based on a higher interest rate. Lenders do this to ensure that in a worst-case scenario, you can still afford the loan payments if the interest rate adjusts upwards in the future.

The interest rate on variable-rate loans typically changes based on the US prime rate. The Federal Reserve often determines the federal funds rate, which impacts the prime rate.

You’ll typically need at least two years in business to get a small business loan. However, lenders that issue startup funding can allow for as little as zero to six months in business, albeit at higher rates and fees.

With a credit score of 680 or higher, you’ll have good odds of meeting a lender’s qualification requirements. That being said, requirements can vary depending on the lender and loan program you choose, with some programs having no minimum credit score requirement at all.

An exact list of required documents will vary by lender, loan program, and the structure of your business. However, you’ll most commonly be asked to provide proof of income and assets. Explanations for credit items and proof of sufficient collateral to be pledged for the loan may also be requested.

On average, it can take three to seven days to get a small business loan. Fast business loans can be obtained as quickly as the same day, while more complex loans, such as mortgages and SBA loans, can take 30 to 90 days.

The 5 Cs of credit generally dictate your eligibility for a loan. The 5 Cs cover aspects of your company’s character, capacity to repay debt, capital, conditions, and collateral.