What Are the Standard Requirements for Business Loans?
Are you considering applying for a loan to finance your company? You’ll want to be prepared to meet the requirements for the business loan. From creditworthiness to collateral, there are a variety of items that a lender will request before approving your loan application.
In this article, we share five of the key factors lenders will require and take into account when deciding whether to approve you for a loan.
5 Requirements for a Business Loan: What the Lender Will Look For
When you apply for a loan, the business lender will have certain requirements you’ll need to meet. How well you fulfill the requirements will determine if you’re approved for the loan. In addition to loan approval, these requirements may help the lender decide your interest rate or repayment terms.
Here are some of the common requirements for a business loan you may see.
When you apply for a loan, the lender will assess your creditworthiness to help them come to an approval decision. They want as much reassurance as possible that you’ll be able to make all of your business loan repayments in full and on time.
Lenders assess your creditworthiness by reviewing your business credit report and credit score. Business credit reports come from credit bureaus like Experian, Equifax, and Dun & Bradstreet. The information on a business’ credit report is used to determine different credit scores and ratings.
For example, Dun & Bradstreet has a variety of scores and ratings that appear in a business’ credit file, including the:
PAYDEX Score: The PAYDEX is similar to a person’s FICO Score, and it is a reflection of your payment history and whether you pay bills on time. The score ranges from 1 to 100, with a score of 80 and above considered a good credit score.
D&B Delinquency Predictor Score (DPS): The DPS tells a lender how likely you are to have issues making payments or to go bankrupt.
D&B Maximum Credit Recommendation: A lender may use this rating when deciding whether to approve you for a loan. It’s based on the size of the business, industry, and payment history.
To improve your business credit score, first, get a DUNS number from Dun & Bradstreet. Make sure that you keep your personal and commercial finances separate and that you pay your bills on time. When you do apply for finance for your business, only work with lenders that report to credit bureaus so you can build up your history.
In addition to looking at your business credit history, a lender may want to see your personal credit score as well.
2. Business Profile
In some cases, a lender will have business loan requirements related to your business profile. This may include your business type, location, size, industry, etc. Let’s look at some examples based on the business profile requirements for the U.S. Small Business Administration (SBA) loan programs.
For starters, SBA loans are intended for small business owners. A small business is defined by the number of employees a business has or its annual revenue. If your business doesn’t meet the definition of a small business within its industry, it won’t be approved for an SBA loan.
The type of business you run is also a requirement that SBA lenders look at. For example, ineligible businesses that can’t be approved include nonprofit organizations, life insurance companies, or private clubs that limit memberships.
Your length of time in business may also be a factor that affects your ability to be approved or influences your loan terms. For example, one Certified Development Company that offers SBA 504 loans will require a higher down payment if a business has been in operation for less than two years.
3. Financial Documentation
Another common requirement for business loans is financial documentation. Your lender may want to see some or all of the following during the application process:
Financial statement: This is a higher-level overview of financial performance, normally created by an accountant or bookkeeper, which includes a summary of your working capital position.
Bank statements: Seeing these helps lenders understand transaction levels, calculate typical balances in your bank account, and assess your cash flow. Some may also ask for business credit card statements to see how well you handle the financing you already have access to.
Profit and loss statement: This is a record of your business's revenues, costs, and expenses over a specific period.
Balance sheet: Your balance sheet shows your assets, liabilities, and equity. If your assets exceed your liability, this signals to potential lenders that you are financially stable.
Financial projections: These are forward-looking estimates of how well your business will perform post-funding. Lenders value these because they show where you will find the cash to make repayments on your facility.
Tax returns: Lenders will analyze your tax returns to understand your company’s historical income and annual revenues. They also use tax returns to assess your ability to meet your general financial obligations.
Incorporation documents: Your incorporation documents give lenders information on how you’ve structured your business legally.
4. Business Plan
A lender may also ask you to submit a business plan as part of their eligibility requirements. They want to see why your business needs the capital you’re asking for. Write up a well-thought-out business plan that outlines what you’ll use the money for and how your revenue will be sufficient to make each loan payment.
In your plan, show clearly how your company will be profitable and explain the market you operate in, how you differ from your competitors, and how you manage risk. Make sure your financial projections are realistic, backing them with data if possible so that they align with both the loan amount and repayment terms you’re seeking.
5. Down Payment, Collateral, and Personal Guarantee
You may also notice requirements on business loans for a down payment, collateral, or a personal guarantee. Let’s take a look at each one.
A down payment is a deposit on your loan, much like the down payment you make on a mortgage when you buy a home. For example, for an SBA 504 loan, you would need to provide a 10% to 20% down payment (also called a borrower contribution).
Each lender and loan type will have its own down payment requirements.
Collateral is a business asset or personal asset that you give as security for a loan. It serves as a form of protection for the lender. If you default on the loan, the lender can take possession of the asset to offset the cost of the unpaid loan.
Sometimes the asset or property you’re purchasing with the loan serves as built-in collateral. For example, if you buy real estate with a business loan, that property will be the collateral. Or if you get a loan to pay for new business equipment, the equipment can serve as collateral.
A personal guarantee is when you and other shareholders in your business agree to become liable as individuals to repay the debt owed by your company. Lenders will try to cover an unpaid loan by selling your collateral first. But if that doesn’t raise enough to cover the outstanding amount, they will ask you to repay the rest from your personal funds.
Do All Business Loans Have the Same Requirements?
No, not all business loans will have the same requirements for you to meet. There are three main types of lenders, and there requirements tend to vary:
Traditional lenders: Historically, local and national banks have been the main source of business loans. The problem for many businesses is that, because banks have a very rigorous application process, it’s sometimes really tough to get financing from them. They generally only consider applicants with strong credit scores, years of experience, and a well-costed business plan.
Credit unions: Credit unions are member-owned nonprofit financial institutions. Their eligibility criteria are usually not as strict as traditional lenders, making them a good option for startups or small businesses in need of funding.
Online lenders: There has been an explosion in the number of online lenders in the past 20 years. They have much faster application processes and have the most accommodating eligibility requirements. If you need quick access to capital, online lenders are often your best option, even if you have a less-than-perfect credit score.
Explore All Your Financing Options
Before you apply, you’ll want to know your lender’s requirements for a business loan. Each lender and loan may be different, but it’s common for a lender to look at your creditworthiness, business profile, financial documentation, and business plan. They may also require a down payment, collateral, or personal guarantee.
However, if you’re struggling to meet the requirements of a loan, perhaps another type of funding would be better for your business. Backd offers two loan alternatives: a business line of credit and a working capital advance.
With a business line of credit, you may be able to get between $50,000 and $750,000 if you meet the following eligibility requirements:
Have been in business for at least two years
Have a FICO Score of 600 or higher
Generate at least $100,000 in monthly revenue
Have a business bank account
With a working capital advance, you may be able to get between $25,000 and $2 million if you meet the following eligibility requirements:
Have been in business for at least a year
Generate at least $100,000 in monthly revenue
Have a business bank account
Apply in just three minutes today to get the funding you need as soon as tomorrow.