Are You Eligible For A Business Loan? Business Loan Requirements Explained

Business loan eligibility is a complex topic. There are a handful of significant business loan requirements you will need to meet with any business lender. But then other factors play a smaller part in a lender’s decision.

 

So, let’s go over all the requirements for a business loan application.

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Why Apply For A Business Loan?


There are many reasons to apply for a small business loan. And for every reason to get a business loan, there are a few ideal types of business loans to take out. Some of the most common reasons to get a business loan are:

  • Working capital expenses
  • Inventory purchases
  • Expansions
  • Emergencies
  • Startup expenses

Fortunately, business loans aren’t too hard to understand. In many ways, there are only a few differences between business loans and personal loans. But the business loan requirements are more numerous than personal loan requirements.

For example, business lenders will usually carry requirements for how long you’ve been in business. If you haven’t been in business long enough, they might reject your application.

In other ways, business loans just mirror personal loans. For example, your Employer Identification Number (EIN) that is used to track your business credit works similarly to your Social Security Number (SSN) for personal loans. While your personal income is taken into account for personal loans, your business revenues are taken into account by business lenders.

So, let’s jump right into the business loan requirements and the paperwork you’ll need to get approved for a business loan.


Top Business Loan Eligibility Requirements


Here are the most common eligibility requirements for a small business loan:

1: Personal and business credit scores

2: Your time in business

The most significant business loan requirement is your credit score. Almost all lenders will state a minimum credit score for getting a loan from them. Higher credit scores are better in all situations. They will get you better rates and qualify you for more lenders.

This is the next wall you need to hurdle to get a business loan. Most business lenders state a minimum length of time you must have in business to be eligible for funding. This simple requirement can’t be avoided, and if you want a good loan, two years in business might be necessary. Many alternative lenders will accept applicants with at least 3 months in business.

3: Your monthly or annual revenues

4: Debt History

Your business’s revenues are important to business lenders. They are to business lenders what your income is to a personal lender.

Business lenders will want to look at your business debt schedule. Your debt schedule will reveal how much debt your business is in. It will also reveal any delinquencies you have on previous debts.

This is another business loan requirement that lenders will state plainly. It’s common to be faced with a $10,000 per month minimum revenue requirement, even among alternative lenders.

Lenders will view a history of late repayments or delinquencies as risky. If you’ve failed to make timely payments on debts in the past, lenders may either reject you or offer worse rates.

5: Collateral/Personal guarantees

6: Commercial Lease

Increasingly, business lenders are offering unsecured loans. While many business loans won’t require collateral, they may ask for a personal guarantee. 

Alternatively, you can get your landlord to verify your lease for the lender.

If you’re getting a secured business loan, you’re going to have to provide proof of collateral. Most lenders will accept high-value tangible assets as collateral.

Understandably, a business lender will want to know that you will be able to conduct business throughout the term of your loan. So, they will often want to see your commercial lease.


Let’s Take A Closer Look


Let’s look a bit more closely at each of the business loan requirements we’ve brought up.

1. Personal and business credit scores

Your credit is the most important factor for a business lender. The higher your credit score is, the better the rates you’ll be offered on loans you apply for. A high credit score is the strongest form of leverage you can get for business loans. Higher scores get you access to more options and more affordable offers.

Be sure to differentiate your personal and business credit scores.

Most lenders will state their personal credit score requirements.

Banks, on the other hand, will look at your business credit. 

  • Your FICO personal credit score will range from 300 to 850.
  • They will offer loans to those with FICO SBSS scores of at least 160.

Most business lenders will have a minimum credit score requirement of about 600. Many alternative lenders have lower minimum credit scores ranging from 500-599. But some business lenders won’t state a minimum credit score. These lenders typically offer much higher rates.

2. Your time in business

Time in business requirements are far more stringent for bank loans. That’s because your time in business can serve as proof that you know how to responsibly run a business.

On the lower end, you will likely need 3 months in business with even the laxest alternative business lenders. Some lenders will have fewer requirements, but they usually won’t offer reasonable rates. Typical time in business requirements for alternative business loans range from 3 to 12 months.

Most banks start offering business loans to business owners with 2 years of experience. If you’ve been in business for at least 2 years and have strong credit, you should qualify for a bank loan. But banks may have more stringent requirements for bigger loans. Larger loans with longer repayment terms may have higher requirements.

In any case, more business experience will always be seen as a positive by business lenders.

3. Your monthly or annual revenues

Business lenders want some kind of assurance that you can pay them back. The simplest kind of assurance they can get is predictably high revenues. If your revenues are high, you should be able to pay back a loan more easily. So, higher revenues will get you access to larger loans.

Most business lenders have a high standard for revenue requirements. Typical revenue requirements will be about $10,000 per month for a small business loan from an alternative lender. But there are plenty of alternative lenders that will give loans to businesses with annual revenues of $50,000.

  • If your business’s monthly revenue is over $10,000 per month, you shouldn’t have a hard time finding a loan. But many bank loans will require significantly higher revenues.

4. Debt History

Having other debts while applying for a business loan isn’t necessarily a dealbreaker. But a history of late payments and delinquencies might be. 

All business lenders will view borrowers with other loans out with some suspicion. If it appears that you cannot afford your current loans, they will be very hesitant to approve you for another. This is why lenders will consider your business debt schedule alongside your income, credit score, and other factors.

There are no exact measurements at which all business lenders will not approve your loan. But business lenders will typically calculate your Debt Service Coverage Ratio (DSCR). This ratio simply weighs your current debt payments against your income. So, it’s a reliable ratio for lenders assessing their risk.

5. Collateral/Personal guarantees

Collateral

Bank loans will typically require collateral. Collateral requirements will depend on the specific lender you go to. The purpose of collateral is to mitigate a business lender’s risk. So, putting up collateral might get you better rates. 

Personal Guarantee

Many alternative lenders don’t ask for collateral for a loan. Instead, they may ask for a personal guarantee. A personal guarantee will have to be signed by all major stakeholders in your business. The guarantee will cause you and any major stakeholders your business to be held personally responsible for unpaid debts.

It’s difficult to get any kind of business financing without collateral or a guarantee. Lenders will always want to reduce their risk. These two forms of leverage help them do so.

6. Commercial Lease

The reason for this requirement is simple. It would, of course, be very bad for your business (and your lender) if you were to suddenly lose access to your business location. So, the lender will want assurance that you will be able to continue operating your business for the term of their loan.

Small business lenders will usually want to look at your commercial lease and any other commercial loan documents. These documents will prove to the lender that you will be able to use the property your business is located on regardless of anything that happens to your landlord.

About The Author:


The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada’s highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the “GPS of Fintech Lending” by the Toronto Star in 2019.