Small Business Loan Requirements

In our guide to how small business loans work, we took a look at three main types of lenders: traditional lenders, SBA loans, and alternative lenders. Each type of lender has different application requirements. Here’s a quick look at how they compare:

Traditional lenders such as banks or credit unions have strict eligibility requirements. Most traditional lenders will only fund established businesses, and will focus their review heavily on your personal and business financial history. These lenders will require thorough documentation when evaluating your application, and the process can take weeks or even months.

SBA loans have the most restrictive requirements. Applicants must have very strong personal credit and business revenue, and must be current on all government loans with no defaults (including federal student loans or government-backed mortgages). You must be operating a for-profit business, and you cannot be on their list of ineligible businesses. SBA loans also require the most documentation, and will take the longest to process with the lowest chance of approval.

Alternative lenders have the most lenient requirements, with greater flexibility to approve loans for applicants that may be weak in one area (such as credit score) but who are strong in another (such as cash flow). These lenders will often look at other criteria as well, such as your online reputation. However, because the requirements are more forgiving, rates are often higher.

Instead of requiring months or years worth of statements and documentation, many alternative lenders will request access to your bank account information so they can review your account history directly. This significantly streamlines the application and approval process—some lenders can even approve funding in as little as one business day.

When evaluating your eligibility for small business funding, lenders will typically look at eight main factors:

1. Credit score
2. Collateral
3. Cash flow
4. Current debt
5. Time in business
6. Industry
7. Tax returns
8. Loan purpose

Different types of lenders will place varying degrees of emphasis on each of these criteria. Let’s take a closer look at each of these factors.

All lenders will evaluate your credit score. Higher credit scores typically result in better loan terms and rates.

Traditional lenders will require a credit score of 600 or higher, while SBA loans will require very strong credit scores of 650 or higher. Alternative lenders have lower credit score requirements, and are often ideal for businesses with low or no credit. Most lenders prefer your FICO score over a report provided by other credit bureaus such as TransUnion, Equifax, or Experian.

Traditional lenders and the SBA will evaluate both your business and personal credit scores. Your business credit score is based on your history of payments to suppliers and other lenders, but can also be based on factors like your industry, business size, and revenue. Your personal credit score, on the other hand, evaluates your ability to repay personal debts, such as credit cards, mortgages, and car loans. If you have yet to establish business credit or have a low business credit score, lenders will place more consideration on your personal credit score when evaluating your eligibility.

Loans that are secured by collateral such as real estate, equipment, or invoices, present less risk to the lender. As a result, providing collateral can help you get approved with better terms and lower fees.

Collateral is required for commercial real estate loans, equipment financing, and invoice factoring, but it is not required for all loan types or lenders. If you don’t have collateral to offer, alternative online lenders are likely your best source of small business funding.

All lenders will evaluate your “debt-to-income” ratio when assessing your funding application, with your income primarily determined by your business’s cash flow. Lenders will evaluate your cash flow by reviewing detailed financial and bank statements, including:

• Balance sheets: These will summarize your business’s financial health, including assets, liabilities, and equity.
• Profit and loss statements: These statements will help lenders evaluate your annual revenue and profits. Year-to-date documentation is typically required, updated within the last 60 days.
• Bank statements: Bank statements will give lenders insight into how you manage your cash. Lenders usually ask for a minimum of four months of statements, but may ask for up to two years.

Steady cash flow tells lenders that you are in a position to manage your loan payments. Traditional lenders will have stricter profitability requirements, while alternative lenders may focus more on your monthly revenue.

Your current debt load measures your monthly debt payments against your monthly gross income. This is the “debt” portion of your debt-to-income ratio, and includes balances on your line of credit, business credit cards, and any other loans or financing you’ve received.

Businesses with too much debt will have trouble getting approved by traditional lenders, and even some alternative lenders—most lenders require a debt-to-income ratio of 50% or lower.

New businesses are unproven and therefore considered riskier than established businesses. As a result, many traditional lenders simply won’t fund businesses that have been in operation for less than two years.

Businesses that have been in operation for less than 2 years can often access funding from alternative lenders. These lenders have much lower time in business requirements—sometimes as low as 5-6 months.

Some industries are considered riskier than others, which can negatively impact your chances of approval when applying for funding from traditional lenders or SBA loans. Traditional lenders also have policies that prevent them from funding businesses in certain industries, such as firearms dealers or cannabis businesses. Seasonal industries or industries that are in decline may also have trouble receiving the funding they need through these channels.

While they can’t fund all industries, alternative lenders are able to fund more industries than traditional lenders, including high risk, seasonal, and other niche industries traditional lenders aren’t able to fund such as cannabis businesses.

If you aren’t sure what industry your business falls into, check out the Standard Industrial Classification (SIC) codes on the North American Industry Classification System (NAICS) website.

Traditional lenders will likely require at least two years of your personal tax returns, especially if you are a sole proprietorship or are in a partnership where your business’s profits and losses are reported on your personal tax return. Business tax returns will also be required for LLCs that are taxed as corporations.

Alternative lenders, on the other hand, may not require your tax returns at all.

All lenders will require you to submit some documentation in order to process your application. Traditional lenders and SBA loans will require more documentation than alternative lenders.

The sooner you can provide any requested documentation, the faster your application will be reviewed and approved. Compiling these documents can be time consuming and difficult, so before you submit your initial application, do your best to prepare any potential documentation that might be requested to help streamline the process.

If you can, collect the following:

• Copy of your driver’s licence
• Other ownerships and affiliations: This includes your ownership in other businesses, as well as your other affiliations such as board member or consultant positions. This information will disclose potential conflicts of interest. The number of owners in a business can also impact your eligibility for certain types of funding, especially for SBA Loans.

• Proof of ownership
• Articles of incorporation
• Commercial lease: This will prove that your business is able to use the property for as long as the duration of the loan.
• Entity type: Knowing how your company is organized (eg. sole proprietorship, partnership, or LLC) can give lenders insight into how your business is managed.
• Employer Identification Number (EIN): Your EIN is like a social security number for your business. You can easily apply for one online.
• Legal contracts and agreements: Existing legal contracts and agreements could impact your financial position or create legal issues down the line. This includes contracts with major suppliers or third parties, corporate bylaws, LLC operating agreements, partnership agreements, franchise agreements, sales agreements, commercial real estate purchase agreements, and equipment purchase agreements.
• Business license/permit: This will prove that your business is legal and registered to operate with your state or jurisdiction.
• Business plan: Include a company description, product or service description, management team information, industry analysis, your plan for your facilities and operations, marketing strategy, and SWOT analysis.