If you’ve struggled to get approved for financing options like small business loans and business credit cards — you’re far from alone. In a recent opinion poll by The Small Business Majority, 90% of small business owners nationwide agreed that the availability of capital was a problem.
It can feel like a catch-22. As Tillful CFO, Bosco Chan, explains, “One of the main requirements to get approved for business credit products is business credit history. However, to build business credit history, you need to have business credit products.” It creates an endless loop that, unfortunately, keeps many companies from accessing business credit.
So what are the most common small business loan requirements, and how can you ensure your business meets them? Here’s what you need to know.
What Are Small Business Loans and Credit Cards?
First things first, small business loans are extended to business owners for purposes such as providing working capital and funding new marketing initiatives. The loans often take the form of:
- Term loans: A lump sum, plus interest, repaid over a set term.
- Lines of credit: A lump sum that you can draw from for a certain period. You only owe interest on what you use. 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. However, credit cards don’t have an end date so you can continue to use them as long as you are keeping up with your minimum payments.
9 Common Requirements for Small Business Loans and Credit Cards
So how do you get approved for business credit products like loans, lines of credit, and credit cards? Here are nine of the most common requirements for small business owners.
Business lenders want to ensure that you have enough cash flow to repay the loan amount or credit line you’re requesting. They can get an idea of the loan payments you can afford by looking at your company’s annual revenue over the past couple of years.
Being so, the business loan application process will often require one or more of the following:
- Income tax returns
- Business tax returns
- Financial statements like balance sheets
- Bank statements
The amount of annual revenue you need will vary from one lender to the next. For example, Bank of America requires at least $250,000 in annual revenue while OnDeck only requires $100,000 per year.
2. Business Credit Score
Many lenders also want to check your business credit scores with one or more of the major business credit reporting agencies — Dun & Bradstreet, Experian, and Equifax.
By doing so, they can find out if your business pays its accounts on time and if you have any defaults, liens, bankruptcies, etc. If you don’t have any business credit established, your loan approval may depend on a personal guarantee or providing collateral.
Warning: A personal guarantee means you are personally responsible for the business debt which negates the protection provided by many business structures.
3. Business Plan
Lenders may ask you for a business plan as part of the approval process. The U.S. Small Business Administration (SBA), for example, requires a business plan to show your execution strategy and prove that you understand the market. It needs to include sections such as a company description, an analysis of industry risk, a description of your target markets, and more.
While you’ll need a business plan for SBA loans and possibly for loans from traditional lenders, one won’t usually be required for non-SBA loans and credit lines from online lenders.
Business loans are available with and without collateral requirements. Secured loans will require collateral while unsecured loans will not. So what type of collateral might be required?
It could be a blanket lien on your business assets, or a lien on a specific asset such as real estate property or a piece of equipment. Chan explains that accounts receivable are the most common type of collateral requested from SMBs because small business owners typically lease, rather than own, business vehicles and real estate.
Loan programs and lenders may also have restrictions in place regarding a business’s industry. For example, real estate investment firms, lenders, 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, many lenders have higher revenue requirements for trucking companies.
Pro tip: You can save time in the application process by first ensuring a lender lends to businesses in your industry.
6. Owner Equity
Next, lenders may require business owners to provide owner equity, also known as having “skin in the game.” SBA loans require owners to invest at least 10% which works like a down payment on a house. So if you request a loan for $500,000, you’d have to put down $50,000 on the loan in owner equity.
7. Personal Credit Score
Personal guarantees are also fairly common for business financing. That means at least one owner of the business will need to undergo a credit check and meet the lender’s credit requirements.
Often, those requirements include a minimum FICO credit score and a lack of negative records such as tax liens, foreclosures, and bankruptcies. Smart Biz Loans, for example, requires a minimum FICO credit score of 660.
If you have bad credit, it will surely limit your business financing options, but not completely (more on that below).
8. Time in Business
A minimum amount of time in business is another common requirement. For example, Bank of America requires two years in business under the same ownership before you can qualify for their business bank loan.
It can be harder to find startup loans because a new business has no track record on which to base its ability to repay the loan amount. They do exist, but are more likely to require personal guarantees and collateral.
Lastly, many lenders require that your business is located and does business in the U.S. or its territories. Further, an institution’s service area may be restricted to a certain state or a few states.
These 9 requirements are commonly found when looking at the offerings of various business lenders and credit providers. But, there are a few other types of business loans that are breaking the mold and playing by different rules.
Requirements for Alternative Small Business Loans
Alternative small business loans refer to business financing options with unique structures and requirements. They can be helpful if you’re having trouble qualifying for traditional options, or if one happens to better suit your needs. 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.
- 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.
- Loans through payment processing companies: Companies like Shopify, PayPal, and Stripe offer qualifying account holders loans based on their sales history and volume. To qualify, you’ll often have to meet the minimum requirements for account history, sales volume, and sales frequency. Credit is often not checked, however, timely payments also aren’t reported to the credit bureaus so these loans won’t usually build your credit.
As you can see, if you are having trouble getting loans from traditional or online lenders, there are other creative small business loan options out there. That said, these often come with higher costs so be sure to weigh the pros and cons carefully.
Chan said, “Alternative small business loans are often more expensive because they are easier to get, presenting more risk for the creditor. Many are non-bank lenders, or non-traditional banks at least, so they look for a higher rate of return for their investors.”
How Hard is it to Get 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.
Harder for Startups
As a new business (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 history established yet. You will have to reduce the risk you present in other ways like showing your business plan, offering collateral, and offering a personal guarantee. Further, you’ll likely face higher interest rates and fees.
Harder with Bad Credit
Getting a business loan can also be more challenging if you have poor business or personal credit scores and any derogatory marks on your business or personal credit reports. However, there are still some options such as MCAs which often base your eligibility on credit or debit card sales.
Easier with Good Credit
On the other hand, if you have good business and personal credit, have been in business for a few years, and have steady revenues, you’ll likely have a variety of small business loan options, making the process very easy.
Chan says, “The number one piece of advice I have for SMB owners is to make sure that you build up your personal and business credit profiles. Going to a traditional bank for business credit is still often the cheapest way to borrow and they aren’t going to stop checking credit anytime soon.”
How Big of a Business Loan Should You Get?
The first component that determines how much your business can borrow is how much lenders or credit providers will extend to you. You can shop around to get quotes and find out. From there, you’ll have to decide on the amount that is best for your situation.
“The key is to understand your ability to service the debt and your cash flow,” said Chan. He adds, “You don’t want to get to the point where the business’s cash flow isn’t enough to pay the debt. However, at the same time, having a healthy balance between using credit and cash flow is going to help you springboard to the next level.”
Should You Get a Small Business Loan?
Whether you should get a small business loan or not depends on the situation. When considering a loan offer, you should review the loan amount, term, repayment structure, and costs to get the full picture. It’s important that the loan repayments won’t hinder you. If you can afford the payment, next consider whether your use of the loan proceeds will provide a return on investment. Will the money put you in a better position than you are in now?
For example, say you have more demand than you can supply. If you borrow to buy inventory in bulk, lowering your costs and enabling you to sell more product, the loan can provide a solid ROI as long as it’s not too expensive. However, if profits have been decreasing and you get a loan to throw an end-of-the-year party for your company’s employees, that won’t directly help to improve long-term profitability so would be a more risky move.
Last Word on Business Loan Requirements
Overall, business lenders and credit providers are in the business of making a profit. They want to lend to companies that will repay their loans in full, plus interest. When the loans don’t get repaid, they lose money. Understandably, they take every precaution to hedge that risk.
Being so, your business needs to show lenders that you are a trustworthy and profitable investment. The best way to do that is to build your personal and business credit scores along with staying in business and growing your company’s profitability.
If you’d like to break in and start building business credit, one of the easiest ways to get your foot in the door is through secured business credit cards. Most any business can get approved and they can help you get your first positive business line of credit on file. Before long, you can be in a better position to access the business funding you need at affordable rates, and without putting your personal assets at risk.