Business loan requirements: What you need to know to qualify

November 2022

A business loan or financing can give you the capital to grow your company, whether you need to buy new property or equipment, recruit new staff, or launch a project. Or maybe you'll need more capital to pass through anticipated slow periods. Suppose this is the case, and you're planning on acquiring more capital. In that case, you'll have to prepare a solid business case and financial statements because anyone who gives you money will want to know that their money will be a good investment.

In the following sections, we will go through what is commonly required to apply for a business loan, especially what you need to know as a small business owner if it is your first time applying for business financing. Let's get started.

1. Annual revenue

One of the most typical business loan conditions you'll find from various funders is the assessment of your company's annual sales and profits. A positive revenue stream demonstrates to funders that you have enough cash to make the loan payment, including the additional cost of borrowing the money (known as interest). Many lenders, such as alternative funders, may only require between $7,500 to $10,000 in monthly revenue to consider approving the business financing. On the other hand, many may require $30,000 or more per month.

Each situation is unique, and these are only broad estimates, so be ready to show how your company has grown over time by reporting revenue, expenses, and profit. You can begin preparing by gathering your business' bank statements and income tax returns. Furthermore, some funders may request to see your profit and loss statements to determine whether you have enough positive cash flow. Additionally, if you don't have a track record of success, you can explain why more funding will help you turn things around.

2. Personal and business credit scores

Your credit scores is one of the most crucial variables in getting a loan approved and in obtaining a reasonable interest rate because individuals with poor credit scores are normally considered riskier by funders. For example, you'll likely need good personal or excellent business credit to apply for an SBA business loan or a traditional bank small-business loan.

Bank or credit union loans often have higher credit score requirements, with minimum scores sometimes being 680 or higher. Just as the last point, it's important to note that nontraditional lenders normally have much more flexible requirements for credit scores; other lenders may approve your business financing with as little as a 500 personal credit score. If your credit score is not the best currently, here are our tips for getting a loan when you have bad credit.

A business credit report can also help you demonstrate your financial responsibility. If you've already applied for a DUN’S number, Dun & Bradstreet can provide you with a business credit report.

3. Time in business

Every funder will inquire about the duration of your business operations. The more time you've been in operation, the better it is for your application since it demonstrates to a potential funder that your company has seen sustained success. In the end, remember that two years should be the cutoff point. It is not difficult to obtain a business loan if your company is less than two years old, but it does restrict your options. Online business funders have a less rigorous requirement but may still require at least three months in business.

4. Business industry and size

There are some industries where the risk factor is labeled "high-risk business," making it difficult to obtain a small business loan. Many funders would not risk lending you money if they knew your business might fail before you could repay them. For this reason, we recommend you check the funder's eligibility for your industry before applying.

5. Debt-to-income ratio

Some funders will look at your debt-to-income (DTI) ratio to evaluate if you can afford more debt. Your debt-to-income ratio (DTI) is the percentage of your gross monthly income (before taxes) that goes toward rent, mortgage, credit card, or other debt payments.

To determine your debt-to-income ratio, you must divide your gross monthly income by your monthly loan payments. For example, your DTI ratio is 50% ($10,000/$20,000) if your monthly debt is $10,000 and your gross income is $20,000.

Your risk as a potential borrower increases with your DTI ratio. Keep your DTI ratio at or below 43% as a rule of thumb, even if minimum DTI criteria differ by the funder.

6. Business plan and loan proposal

Funders will inquire about your intended usage of the funds and inquire as to your good repayment capacity. They can ask for a business plan that details your objectives for the company and how you intend to achieve them. A business loan proposal, which outlines the loan's purpose and how you plan to repay it, may also be required by some traditional lenders.

These documents must show you have enough cash flow to pay the new loan payments and continuing business expenses. A solid business case may increase the funder's trust in your company and raise the likelihood that the business loan will be approved.

7. Collateral or a personal guarantee

Many business loans call for collateral, which the funder could seize in the event of a failure. Due to the funder's reduced risk, loans secured by collateral frequently have lower interest rates.

The new asset or equipment acts as security for some loans, such as those for commercial real estate or equipment finance. It would help if you listed assets such as machinery, accounts receivable, inventory, or other real estates to qualify for other loans. A personal guarantee is another requirement for many loans, meaning that you are personally responsible if the firm cannot repay the loan.

After knowing these 7 points to consider for business loans, you might want to explore other avenues. Check out our top 6 choices for alternative fast working capital your business might benefit from.

Need further guidance for alternative funding?

We are here to help! One Park Financials' business funding programs work to give entrepreneurs with more than three months of operations and at least $7,500 in monthly revenue the capital they need fast. 

Our funders specialize in providing financing options designed to meet the needs of small businesses. We care more about your business's potential than your credit score. You can check if you pre-qualify by filling out our online form in minutes. Launch your business for success this 2023!

Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.