10 small business loan requirements (you should be prepared for)

If you’re not sure how to get approved for financing options like small business loans, lines of credit, or even business credit cards, you’re far from alone. 

In the Federal Reserve’s 2023 Small Business Credit Survey of non-employer firms, only 29% of business owners said they applied for financing in their first two years in business. Seventy-six percent reported using personal funds in response to financial challenges. 

Once you understand what lenders are looking for, you’re in a better position to set your business up for financing success. Here’s what you need to know about small business loan requirements. 

What SMBs should know before applying for a business loan

Small business loans are extended to business owners for purposes ranging from working capital (day to day expenses), to financing new equipment, to financing commercial real estate. Loans often come into two broad categories:

• Term loans: A lump sum, plus interest, repaid over a set term.
• Lines of credit: A credit limit against which the business can borrow as needed during the draw period. You only pay interest on the funds you borrow. When the draw period ends, you often enter a repayment period that is similar to a term loan.

Business credit cards are similar to business lines of credit, as they offer a credit line that’s designed to be used for business expenses. 

There are other types of financing, such as business cash advances, invoice factoring, and microloans, that we’ll discuss in more detail shortly.

The bottom line is you may have more choices than you realize, and if one type of financing isn’t available to your business, another may be if you know what to look for.

10 common requirements for small business loans and credit cards

Here are nine of the most common requirements for small business owners.

1. Revenue 

Lenders need to know your business can pay back the loan. They’ll look at your revenue to decide if you qualify. Revenue shows lenders how much money your business brings in.

To verify revenue the business may require:

• Copies of business bank statements
• Business tax returns and/or personal income tax returns

Again, every lender has its own revenue requirements. Many lenders require at least $10,000 in average monthly revenue, and some require gross sales of $250,000 or more.

Tip: Use a business checking account and make sure all business revenue flows through that account. Stay up to date on tax deadlines as well. 

2. Credit scores

Many types of small business loans and financing require credit checks. Some companies check personal credit, some check business credit, and some check both. (A few don’t check credit at all.) 

Lenders that check personal credit scores often require personal guarantees. A personal guarantee means you are personally responsible for the business debt. This may be a soft credit check which doesn’t affect credit scores. If the business has multiple owners, the lender may check each one’s personal credit. 

Lenders that require good credit usually look for minimum FICO credit scores of at least 650-680.

If you have bad credit, it will limit your business financing options, but there are options that don’t require good credit. (More on that below). 

Some lenders check your business credit scores with one or more of the major business credit reporting agencies, such as Dun & Bradstreet^®, Experian^®, and Equifax^®.

A business credit report will help the lender understand if your business pays its accounts on time and whether it has a history of financial problems such as collection accounts, judgments or bankruptcies. 

Credit history is used to evaluate creditworthiness. If your business has not established business credit, the lender may require good personal credit and/or a personal guarantee to reduce their risk. 

Tip: Check your personal credit scores and business credit scores before you apply so you know what lenders will see. 

3. Time in business

New businesses are more risky than established ones. That’s why lenders often require that a business be established for a minimum number of months before it is eligible for small business financing.

While every business lender has its own requirements, here are some typical requirements for time in business:

• Business credit cards: 1 day in business
• Bank and SBA loans: 2+ years in business often preferred
• Equipment financing: 6 to 12 months in business
• Accounts receivable financing: 3+ months in business
• Business lines of credit: 6 to 12 months or more in business
• Term loans: 12 to 24+ months in business

If you’re thinking about starting a business, don’t stay in the planning stage too long. By taking basic steps like forming a business entity or even getting a business license or Employer Identification number (EIN), you can establish an official start date for your business. 

4. Industry 

The industry in which your business operates can affect whether it can get financing. Lenders often prefer certain industries and avoid others. This helps them manage their risk.

For example, real estate investment firms, money lending, businesses that involve pyramid sales plans, and gambling-based businesses, aren’t eligible for SBA loans. 

Other loan types or lenders may have different requirements based on industry; for example, some lenders have higher revenue requirements for loans to trucking companies.

Industry is often identified with NAICS codes or SIC codes. Here’s what you can do:

• Make sure you choose your NAICS code carefully. 
• Check any industry codes listed on your business credit reports to make sure they are accurate.
• Before applying, check whether the lender works with businesses in your industry.
• If you’re in a high-risk industry, look for lenders who specialize in your industry.

5. Collateral

Collateral is property or assets you pledge to back a loan. If your business can’t pay it back, the lender can take this collateral to recover their money.

Lenders want collateral to reduce their risk. If you default on the loan, they have a way to get some or all of their money back.

Common types of collateral:

• Business equipment
• Inventory
• Accounts receivable
• Real estate
• Vehicles
• Personal assets (in some cases)

Keep in mind that not all loans require collateral:

• Secured loans require collateral. They often have lower interest rates.
• Unsecured loans don’t require collateral. They may have higher interest rates or stricter qualification requirements.

Some lenders may ask for a “blanket lien.” This gives them the right to seize any or all of your business assets if you default.

Before offering collateral, think carefully. Only pledge assets you can afford to lose. Also, keep detailed records of your business assets. This can help you get a more accurate valuation for your collateral.

Collateral for small business loans will often be listed on business credit as UCC liens. Make sure you review the UCC filings section of your business credit reports carefully to make sure information is accurate. 

6. Owner’s equity

Owner equity is money you invest in your own business. You may have heard this referred to as having “skin in the game.”

When you invest your own money, lenders see you as more committed to your business’s success. This makes them more willing to lend to your business.

How it works:

• Lenders may ask you to contribute a percentage of the loan amount.
• For example, SBA loans often require at least 10% owner equity.
• If you apply for a $500,000 loan, you’d need to invest $50,000 of your own money.

The amount can vary, though, and some lenders may require more or less. Not all lenders require owner’s equity. It’s more common with traditional financial institutions like banks. If it is required, it can come from:

• Personal savings
• Money from selling personal assets
• Contributions from business partners

Start setting aside money for owner equity early. It gives you more options when you’re ready to apply for a loan.

7. Cash flow

Cash flow is the money that moves in and out of your business. Lenders use it to help them evaluate whether your business can afford loan payments.

While revenue tells lenders how much you earn, cash flow shows how much money you have on hand to pay bills and debts.

Lenders may require financial statements such as:

• Profit and loss statements
• Balance sheets
• Cash flow statements

These documents help lenders understand:

• How much cash your business has after paying expenses
• If there is enough left over to make loan payments
• If income is steady or seasonal, and increasing or decreasing

Tips to improve your cash flow:

1. Invoice promptly and follow up on late payments
2. Negotiate better terms with suppliers
3. Control inventory to avoid tying up cash
4. Consider offering discounts for early payment

To help improve your loan approval chances:

• Keep accurate, up-to-date financial records
• Use accounting software to generate professional reports
• Be ready to explain any cash flow gaps or seasonal fluctuations

Strong cash flow can help you qualify for better loan terms by showing lenders your business can afford the loan payments.

8. Business plan

A business plan shows lenders you’ve thought carefully about your business’s future. A solid business plan proves you understand your market and have a clear path to profitability. It also helps lenders understand why you need financing, and how you’ll use those funds to make money.

Some of the best small business loans include traditional bank loans, and loans guaranteed by the U.S. Small Business Administration (SBA loans), including SBA 7(a) loans. These loans may require a business plan. Online lenders and lines of credit usually don’t require one. 

Even if a lender doesn’t require a business plan, having one shows you’re serious about your business. It can give you an edge in the loan application process.

9. Location

Finally, lenders will likely require that your business is located within their service area, and that it does business in the U.S. or its territories. It’s not unusual for banks, credit unions or other lenders to operate in specific states, and if your business is located outside those states, it won’t be eligible for financing. 

10. Business structure

If your business operates as a sole proprietorship, it may find it harder to get financing. That’s because some lenders will only lend to LLCs or corporations. (Business credit cards are an exception: many of them don’t require a formal business entity.)

Even if you are able to get financing as a sole prop, keep in mind there is no legal distinction between you and your business. You’ll be responsible for any debt you take out on behalf of your business.

Nuances of a small business loan application

Applying for a small business loan isn’t just about meeting lender requirements. It’s also about finding the right type of loan for your business. Here are some key points to keep in mind:

Get organized 

When your finances are up to date, you’ll find it a lot easier to qualify for many types of loans. If a lender asks for business bank statements, you should have them. If they want  financial statements, tax returns, or legal documents, be prepared to provide them quickly. Having everything ready (and easy to find) can speed up the process. 

Of course, this isn’t always easy when you’re in the weeds trying to run your business. If you don’t have the time or expertise, consider hiring a bookkeeper or at least learning the basics of accounting software to help make it easier to stay up to date. 

Know your numbers

If you track your cash flow, you’re in a better position to know when and how much your business needs to borrow, as well as how you plan to use the funds. If your cash flow or revenue hasn’t been steady recently, lenders will want to know why. 

Shop early

Different types of financing are right for different situations. If you wait until you can’t make payroll to shop, you’re at risk of settling for expensive financing. Try to shop around for financing at least two months before you anticipate you’ll need it. And consider getting a line of credit while your business is doing well, so it’s available if your business faces a cash flow crunch.

Read the fine print

Everyone says to read the fine print, but few borrowers do. However, this is one of the most important ways to protect yourself from potentially predatory loans. 

Carefully review the repayment terms, and not just the monthly payments (or daily payments, depending on the type of financing). Understand whether the financing comes with personal guarantees or performance guarantees, what collateral you’ll pledge, and whether there are penalties for paying off your loan early. 

Be honest

Fill out loan applications accurately. Don’t try to hide debts or fudge numbers. If a lender gets conflicting information from a business credit report, it may decline your application. 

Requirements for alternative small business loans

Alternative financing options can be helpful if your business is having trouble qualifying for more traditional loan programs, or if your business needs financing very quickly. Here are a few examples:

• Invoice factoring: Invoice factoring involves selling your outstanding invoices to third parties to improve your cash flow. To qualify, you typically need invoices owed to you from creditworthy clients. (Invoice financing is somewhat similar, but in this case invoices may serve as collateral for the loan.) 
• Merchant cash advance (MCA): Merchant cash advances are lump-sum advances offered by lenders based on a company’s debit/credit card sales. Typically, you need steady sales to qualify. Some lenders may also have minimum requirements for time in business, credit score, and annual revenue.
• Payment processor financing: Companies like Shopify, PayPal, and Stripe offer qualifying account holders financing based on their sales history and volume, and it often works like merchant cash advances. To qualify, your business will often have to meet the minimum requirements for account history, sales volume, and sales frequency. Credit checks are less common, and payments also aren’t reported to the credit bureaus so these loans won’t usually build business credit.

Is it hard to get approved for small business loans?

Getting a small business loan can be easy, hard, or it can land somewhere in between. It depends on where you try to get the loan, the eligibility requirements, and how much risk you present as a borrower. Specific challenges include:

Startups

As a startup (1-2 years or less in business), it’s likely going to be harder to get a loan because you don’t have any business revenue or credit history established. That’s why some business owners rely on business credit cards, microloans, crowdfunding, or even personal loans, during the early stages of their business.

Read: How to get a startup loan with no money

Bad credit

Getting a business loan can also be more challenging if you have poor business or personal credit scores and serious derogatory marks on your business or personal credit reports. However, there are still some revenue-based financing options, such as merchant cash advances or invoice factoring, that often are more flexible when it comes to credit.  

Read: Business loans for bad credit

Nav’s verdict on small business loan requirements

Lenders want to make loans to companies that will repay their loans in full, plus interest or fees. That’s how they make money. When the loans don’t get repaid, they lose money. Understandably, they take precautions to reduce risk. 

Understanding the requirements for different types of loans and financing can help your business find the right option for your stage of business.

Nav can help. Nav Prime makes it easy to build, manage, and leverage your business credit all in one place. When you’re looking for financing, Nav can help you view your top financial options based on your business data. Get started now. 

Frequently asked questions about business loan requirements

What disqualifies you from a small business loan?

The most common hurdles small business owners face when getting financing for their business include:

• Lack of sales/income: Lenders often have minimum income requirements. Businesses with low or declining sales may find it difficult to qualify, whether they are getting a new loan or refinancing an existing one. 
• Time in business: startups have a hard time getting financing as they aren’t yet established.
• Poor credit: Low personal credit scores or business credit scores, or very negative information (like bankruptcies or collection accounts) on credit reports can disqualify a business from some types of financing. 
• Industry: Some lenders will not make loans to businesses in industries that are considered high risk. 

What credit score do I need to get a small business loan?

Small business loan options that require good credit often require a minimum FICO score or VantageScore score of 650-680 or higher. But every lender is different—some types of financing rely more on revenue than credit, and may have credit score requirements as low as 550–600. 

What kind of loan do I need to start a small business?

Startups will find it harder (though not always impossible) to get a traditional small business loan. If that’s the case, consider these options:

1. Personal loans: Use your personal credit to fund your business startup. Talk to an accountant to understand the best way to loan money to your business. 
2. Business credit cards: Since most credit cards are available regardless of time in business, a 0% intro APR credit card may provide funding you can’t get otherwise. 
3. Microloans: These are smaller loans (usually $500—$50,000) from non-profit organizations or the SBA. Kiva is a microlender that offers 0% APR loans up to $15,000 in the US. 
4. Friends and family loans: Borrow from people you know, ideally with a formal loan agreement to avoid misunderstandings. 
5. Crowdfunding: Raise small amounts from many people online, often in exchange for rewards.
6. Equipment financing: If you need specific equipment to launch your business, you may be able to use an equipment loan or lease to get it.