When you need more money to expand or enhance your business, it may be time to seek a business loan. Business loans have stricter requirements than many other types of loans because they present a bigger risk to the lender. Make sure you meet the requirements before you apply.
Business loan requirements by lender type
The type of lender you choose will change your loan experience:
- Banks and credit unions: As the traditional way to borrow money and generally more established, banks typically offer higher loan amounts than other lenders. They also tend to have lower rates for those who qualify, but they have more strict requirements.
- Online lenders: These lenders do not have as many requirements as loans from banks and the U.S. Small Business Administration (SBA). These lenders tend to focus on annual revenue, profitability, time in business and credit score to determine eligibility. You may still need to provide bank statements or accounting software. Online lenders can often approve the loan and distribute funds faster than other lenders.
- SBA loans: SBA loans have low rates but strict requirements. In addition to the standard requirements listed below, you will also need a personal background and financial statement, resumes of all business owners, income tax returns for the past three years and a statement about why SBA assistance is needed. These loans tend to take the longest to process.
Llama Loan requirements
At Llama Loan, we can help you every step of the way to make applying for a business loan as easy as possible. We only require an application, six months of bank statements and the prior two years of tax returns for loans above $200,000.
Typical business loan requirements
Every lender has different business loan requirements, but the requirements generally fall into some common categories, including credit score, business plan, loan purpose, business age, business revenue, industry and business size, debt information, collateral and documentation.
Credit score
When you borrow money, your lender wants to know about your financial history so they can better predict how you manage money and debt. Your lender will check your personal credit score and, if you have one, your business’s credit score to determine your eligibility.
The better your credit score is, the greater your chance of getting approved and a low interest rate. A poor credit score could result in you not getting approved for a loan. However, credit scores are not the only factor, so even with a good score, other factors could still result in subprime loan conditions.
Most lenders use FICO to evaluate your credit score. FICO credit scores range from 300 to 850:
- <580 Poor
- 580-669 Fair
- 670-739 Good
- 740-799 Very good
- 800+ Excellent
You can get a free credit score once a year through Equifax, Experian and TransUnion, although some websites and services will let you check more often. If your credit score is low, you can improve your credit score by paying your bills on time, reducing your debt-to-income ratio and paying your credit card bills strategically.
Credit score requirements vary by lender. Banks and government loans usually have higher credit requirements, while online lenders might put more of an emphasis on your business history or cash flow. Many lenders expect you to have a credit score of at least 650.
If your business has been in operation for some time, it may have a credit score of its own. Business credit scores range from 1 to 100 and are reported by Experian, Equifax and Dun & Bradstreet. A good business score ranges from 80 to 100.
Business plan
Most business plans should include the following:
Business goals
- Outline your goals and how you intend to reach them.
Customer and industry details
- This section should explain the current market and how you will increase sales based on your customers and the industry. Showcase your experience in the industry and how your business will do well within it.
Description of your service or products
- Explain what you are selling and why it is better than what your competition offers. This section should give the lender confidence that your product or service can be successful and, ideally, continue to grow.
Finances
- Lenders will want to know how money comes in and goes out of your business. Include a five-year forecast of income and expenses, including debt. List how much you have invested into the business already. If you have employees, explain the costs.
Supply chain
- If this section applies, it should describe how you source your supplies and materials. Be thorough by explaining how rising prices of those things could affect your business.
Loan purpose
Lenders want to know how you will use the loan and repay it. Specifically, they want to know that you will get a positive return on investment to repay the loan without problems.
Generally, you will have trouble with your application if you do not have a specific purpose for the funds. Applying for a large amount of money for general business usage may make lenders more nervous about your ability to make enough money to pay back the loan.
Business age
The Bureau of Labor Statistics reports that a significant percentage of new businesses fail within the first five years. Because of this, lenders generally do not give loans to new businesses. Startups do not have a track record to demonstrate the ability to stay in business, let alone repay a loan.
Traditional lenders like banks usually require the business to be at least two years old. Online lenders with more lenient requirements still typically require at least six months of being in business.
Lenders will look at how long bank accounts have been in operation, not how long the business has been registered with the government. In other words, if you registered your business six months before you started operation, those six months will not count toward your business age.
Business revenue
How much money your business makes is an important factor, so lenders usually have a required minimum income. If you don’t meet the requirements, you will need to look into other financing options, such as a personal loan.
How much monthly or annual revenue is required depends on the lender. Some lenders require minimums of $100,000 or $250,000 annual revenue for borrowers to qualify for a loan or line of credit.
To prove your business revenue, you will need to provide documentation in the form of your business income tax returns and bank statements. You may also need to show profit and loss statements.
Industry and business size
Private lenders may or may not have requirements in this category, but loans backed by the U.S. Small Business Administration always do.
To qualify for SBA loans, you have to qualify for its definition of a small business and can’t exceed a certain size. Beyond that, you must be a for-profit company that doesn’t operate in certain industries such as gambling or religious activities. As an individual, you cannot have any defaults on past government loans such as an FDA or USDA mortgage or a federal student loan.
Some industries are riskier than others, so lenders may have higher requirements for some industries or may not offer loans at all for certain business areas. These can include industries such as marijuana, pawn shops, real estate or the adult industry. Other industries that may have trouble finding a loan include some seasonal businesses like golf courses that may not be able to make a steady profit year-round.
Collateral
Some lenders require collateral to back the loan. This collateral can be a business asset such as real estate, inventory or equipment the lender could sell if you do not repay the loan. Many lenders will also require a personal guarantee that requires you to repay the loan yourself if the business cannot.
Unsecured business loans don’t require collateral. However, lenders often still require a personal guarantee or even a general lien on business assets.
Essential documentation
Applying for a business loan will require a lot of paperwork. Online lenders may have a more streamlined process with fewer required documents. Regardless of the source of your loan, be prepared to have the following documents in case you need them:
- Articles of incorporation
- Balance sheet and income statement
- Bank statements from a business account
- Business insurance plans
- Business licenses
- Commercial leases
- Disclosure of other debt
- Driver’s license
- Employee Identification Number (EIN)
- Financial projections
- Ownership and affiliation information
- Payroll records
- Personal and business income tax returns
- Proof of collateral
- Resume showing your relevant business experience
- Social Security number or Individual Taxpayer Identification Number.
Debt information
Lenders may want to evaluate your personal and business debt.
Your debt-to-income (DTI) ratio looks at your debt compared to your income. You can calculate it by dividing your debt by your gross income. The higher your DTI is, the riskier you look as a potential borrower. Lenders will have different requirements, but a general suggestion is to keep your DTI under 35%.
Some lenders will also consider your business’s debt-service coverage ratio (DSCR). Like a DTI, the DSCR measures your business’s annual net operating income to its annual debt. Your annual net operating income is also known as earnings before interest, taxes, deductions and amortization (EBITDA). You can calculate your DSCR by dividing the EBITDA by its total annual debt.
A ratio of more than one shows that your business generally has income after expenses. SBA loans require at least a 1.15 DSCR.
Apply for a loan with Llama Loan
The list of requirements for a business loan can look long and difficult, but the process of applying doesn’t have to be. We specialize in helping small business owners find the right loan for their businesses. We help make the application process faster and smoother so you can focus on your business. Contact us today to get started.
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