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Small Business Loan Requirements: Documents Required, Credit Score

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Small Business Loan Requirements: Documents Required, Credit Score

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About Small Business Loan Requirements

What is usually required for a business loan?

Business loan requirements can vary depending on the type of loan and the lender. Here are some requirements you should be aware of:

1. Revenue

2. Time in business

3. Credit score 

Before you go to apply for a business loan, you should make sure you’re in good financial standing. To view your business credit score through the eyes of a lender, check out mySMBscore.

What disqualifies you from getting a business loan?

To maximize your chances of being approved for a business loan, it is important to understand what is required for a business loan - or what may disqualify you - before you apply. Although lender requirements are not standardized, they often require the same basic prerequisites. 

Some things that may disqualify you from a business loan are: 

  • Just starting in your business venture. Lenders usually have certain requirements for how long a business has to have been operating before considering a loan. These requirements vary by lender - we’ll dive deeper into those requirements below. 
  • Low annual revenue. Loan distributors want to know that your business makes enough to be able to afford an additional monthly balance. 
  • The business conditions in the industry where you operate are deteriorating. Lenders will be less likely to approve a loan in a struggling or expiring industry. 
  • Some distributors cannot provide loans to businesses within certain industries. Common businesses that may be restricted for lenders to work with include gambling and adult entertainment companies. 

What credit score is required to get a small business loan?

While keeping in mind that each lender may have different credit score requirements for loan approval, here is what you can expect: 

  • It’s unlikely any lender will approve a loan for applicants with a credit score under 500.
  • A score between 500-650 may qualify you for a  loan but with high rates.
  • Loans for applicants with a higher score will have more loan options that come with more favorable terms. 
  • The lower your credit score is, the higher you can expect interest rates and/or fees to be.

In the credit scoring system, scores range between 300 and 850. Generally speaking, anything below 600 for a personal credit score is considered "bad" credit, regardless of the reporting model used. While bad credit loans are obtainable, utilizing one has pros and cons. 

PROS of a bad credit business loan:

  • Quick access to needed funding 
  • Possibility of increasing credit score with each payment made on time

CONS of a bad credit business loan:

  • Business loan terms will likely be less favorable compared to a good credit loan 
  • Collateral may be required - meaning the bank could choose to seize your collateral if you default on your payments
  • Lenders may choose to build a smaller loan amount package for borrowers with bad credit 

For borrowers with scores that are less than favorable, it is advised to utilize mySMBscore for tips on how to improve your business’ credit score before applying for a loan. Ensuring you are in the best place possible with your credit before securing a loan will make repaying that loan easier. Securing a loan with unfavorable terms can significantly impact your business by driving you further into debt. 

On the other hand, borrowers with good credit scores may still have room for improvement. MySMBscore can help business owners with good, and bad credit scores understand what they should qualify for and/or what steps they can take to improve their ability to qualify. 

Is annual revenue a business loan requirement?

Business lenders usually set a minimum revenue requirement for borrowers to guarantee they have the money to make payments. The annual revenue requirements of traditional business loans, including those from banks and online lenders, often dictate the amount of money you can borrow. The lender will want to see that you have adequate and consistent cash flow to handle the new loan. Most lenders require annual revenue of between $100,000 and $250,000. However, some may accept businesses with lower earnings.

How many years in business are required to get a business loan? 

A bank will typically require you to be in business for at least two years before you can apply for a business loan. Most online business loans have less strict requirements than traditional bank loans, but they usually require at least six months of business experience. 

What documents are required for a business loan?

When applying for a loan, there will be documents that you, as the borrower, need to prepare to present. A lender can decide on a loan based on the information in the loan documents. Lenders may also require personal information, such as your credit score and debt-to-income ratio, and business and financial information.

When seeking a business loan, these are some things you should be prepared with: 

  • Business license and registration. A business license is a document that is legally required for operation. Registration may be your business license or a partnership agreement. 
  • Credit report. Lenders can review your credit to determine whether or not you have a sufficient history of making your payments on time. A higher credit score will raise your chances of being approved for a loan. 
  • Copy of your current commercial lease. Demonstrate your place of business is secure while also validating the expense. 
  • Insurance plans. Insurance can minimize risk for lenders. 
  • Revenue statement. Loan distributors need this to verify your business’s financial performance and decide whether you can increase your monthly debt. 
  • Potential collateral. Some business loan lenders may require you to put up collateral. They may choose to seize any collateral if you default on your payments. Examples of collateral can be your vehicle or home. 
  • EIN. EIN, or Federal Employer Identification Number or Federal Tax Identification Number, is a 9-digit number issued by the IRS  to US businesses for identification purposes.
  • Business plan. Your business plan will guide how you plan to organize, manage, or expand your business.
  • The intent of use. Be prepared to present what your intentions with any borrowed money may be. 
  • Business income tax returns. It is pretty standard for lenders to request the past three years' worth of returns to gain insight into your expenses and income. 

These are some of the documents you should be prepared to present when applying for a business loan. Contact your chosen lender to understand better what specific requirements or documents they request. 

During the process, there will also be documents that you have to read, agree to, and sign. The lender’s application process typically begins with a loan estimate document. This can provide the general terms for the loan. A rate lock form might then be used to guarantee the loan’s rates for a set period. Also required is a borrower’s information form, which outlines the applicant’s personal information. The final details about the loan are provided in what’s called a closing disclosure. The closing form includes details on the loan amount, interest, fees, taxes & all other terms & charges.

How long must a business be established to get a business loan?

Having a business that is well established betters your chances of being approved for a loan. Lenders like to be sure that your business has been consistent. This reassurance implies that you will continue to have a steady income and the ability to repay the loan. Having been in business for a long time benefits your application because it demonstrates to a lender that your enterprise has been successful for a protracted period. Online lenders may have more flexibility in terms of lending to newer businesses. 

Taking out a business loan can be intimidating, but if your business can benefit, it may be worthwhile. There are many situations in which financing is sought. Some of them may be advertising, equipment costs, new hires, or unforeseen circumstances. As long as your credit is in check and you meet lender requirements, a business loan can solve any of those common financial speed bumps. 

Once you have researched what obtaining a business loan entails, head over to MySMBscore to get a pulse on your credit ranking or what you can do to improve your chances of obtaining financing. MySMBscore was created to help businesses prosper by providing tools to help you keep tabs on your financial standings. With access to credit reports, personalized offers, a score simulator, an overview of accounts, and more - MySMBscore is there to help your business soar. Your detailed score analysis will provide information such as credit age, history, inquiries, and more. Being familiar with this information will aid in keeping your credit on track to qualifying for a business loan with favorable terms. 

Receive personalized recommendations that will help your business qualify for a competitive business loan. . .check your SMB score now!

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