Business Loan Requirements: How to Qualify For A Business Loan

Business Loan Requirements:

​ How to Qualify For A Business Loan

1. Business & Personal Credit Scores
When you submit a business loan application, a lender will typically review both your personal and business credit scores to assess the risk you pose. While a bad personal credit score can hurt your chances of approval, a good personal credit score can improve your loan approval odds and help you secure a lower interest rate.

2. Annual Business Revenue & Profit
Lenders often have minimum annual revenue requirements, and some have minimum monthly revenue requirements, too. To confirm your business’ earnings, a lender will request your business’ bank statements and income tax returns. You can upload your bank statements manually or allow a lender to connect to your bank and analyze your statements, if available.

3. Time in Business
Businesses that have been in operation for longer have a greater chance of loan approval. While minimum time requirements vary, it’s common for traditional lenders to require you to have at least two years in business. Online lenders often require applicants to be in business for at least six months to a year.

4. Debt-to-income Ratio
Some lenders will review your debt-to-income (DTI) ratio to determine whether you can afford to take on additional debt. Your DTI ratio weighs your monthly debt against your gross income.
You can calculate the DTI ratio by dividing your monthly debt by your gross income.The higher your DTI ratio, the greater your risk is as a potential borrower.

5. Debt-service Coverage Ratio
Another ratio some lenders consider is the debt-service coverage ratio (DSCR), which measures your business’ annual net operating income in relation to its total annual debt. Remember, annual net operating income is another way to say earnings before interest, taxes, deductions and amortization (EBITDA).

6. Business Plan
Some lenders may require you to share your business plan, especially if you’re a startup, which may include the following:
Financial projections
Purpose of using the funds
Industry outlook
Competitive analysis
Your plan should provide a lender with a detailed outline of how you intend to use the loan funds and include a five-year forecast of cash flow, income and expenses.

Documents Commonly Required for Business Loans
Before you apply for a small business loan, gather the required documents. A lender will likely ask for some or all of these items:
Bank statements
Personal and business tax returns
Business licenses and permits
Employee Identification Number (EIN)
Proof of collateral
Balance sheet
Copy of your commercial lease
Disclosure of other debt
Accounts payable and accounts receivable aging
Ownership and affiliations
Legal contracts and agreements
Your driver’s license
Business insurance plans
Payroll records
Incorporation documents
Business plan