Business Loan Requirements: What Lenders Look For

Every lender evaluates similar factors. This guide breaks down what you need to qualify.

Time in Business: The Requirement Nobody Can Work Around

Every other requirement has some flexibility. This one does not. A lender's pricing model depends on your revenue history, and if you have six months of trading, there is nothing to model.

Traditional banks generally want two years of trading, occasionally one for a strong, well-collateralised borrower. SBA loans require the business to be operating and, for the 7(a) program, to meet the SBA's definition of a small business in its industry. Online lenders will work with as little as six months, and factor the greater uncertainty into a materially higher rate.

The practical consequence: if you are under twelve months old, plan around products built for new businesses rather than trying to qualify for a bank term loan. Our startup financing options guide covers what is actually available at that stage.

Revenue, Profitability and the DSCR Threshold

Lenders are not primarily interested in how much revenue you generate. They are interested in whether the business produces enough cash to service the debt with a margin of safety.

The metric is Debt Service Coverage Ratio (DSCR): net operating income divided by total annual debt service. Most lenders require a minimum of 1.25. Some go to 1.35 for unsecured lending. If your DSCR is 1.10, you will be declined or offered a smaller amount at a worse rate.

Revenue minimums vary by product. Microloans can work from $50,000 annual revenue. Bank term loans commonly start around $250,000. The revenue figure matters less than the ratio it produces, though: a business with $400,000 revenue and $120,000 net operating income is a better borrower than one with $2 million revenue and $60,000 net operating income.

Credit Profile: Both Scores Matter

This is where most applications fail, and it is also where most borrowers misunderstand their own position.

Personal credit is assessed because of the personal guarantee. Most banks want a FICO of 680 or above. Below 650, bank products become very difficult and you are pushed into online lending or secured finance. Below 600, options narrow sharply — see our guide to bad credit options.

Business credit is separate and is built from how you pay suppliers, whether you have trade lines reporting, and how long the entity has existed. Many owners have no business credit file at all, which is not disqualifying but does mean the personal score carries the entire decision.

Before applying, pull both files and dispute any error. A single incorrect late payment on a personal report can move a score 40 points, and correcting it before the application costs nothing.

Collateral and the Personal Guarantee

Collateral is not always required, but it changes price and size significantly. Where collateral exists, expect a blanket lien over business assets rather than a lien on the specific item you offered. Read that clause carefully: a blanket lien restricts your ability to finance other assets later.

A personal guarantee is required on the overwhelming majority of small business loans, including SBA 7(a). It means the lender can pursue your personal assets if the business defaults. In community property states this can extend to a spouse's assets. There is no way to negotiate it away for a small business — but you can negotiate its scope, for example limiting it to a specific amount or removing it after a period of clean payments.

The Document Checklist

Gather these before you apply. Missing documents is the most common cause of an application stalling for weeks.

For SBA loans, add a detailed business plan, a use-of-proceeds statement, a two-year projection, and a personal financial statement on the SBA's own form.

• Two years of business tax returns, all schedules
• Year-to-date profit and loss statement and balance sheet, usually within 90 days
• Three to six months of business bank statements
• Personal tax returns for the last two years, for owners of 20% or more
• Business debt schedule listing all outstanding obligations with balances and payments
• Certificate of incorporation or formation documents and operating agreement
• Proof of business address and ownership/lease agreement
• Accounts receivable and payable ageing report, for working capital loans
• Photo identification for all guarantors
• Collateral documentation: equipment schedules, property deeds, appraisals

Worked Example: Two Applicants, Different Outcomes

Applicant A runs a landscaping business, four years trading, $620,000 revenue, $145,000 net operating income, $48,000 existing annual debt payments, FICO 704, and owns $60,000 of equipment free and clear. DSCR is 145,000 ÷ 48,000 = 3.02. Requested $150,000 over five years.

Applicant B runs a café, 14 months trading, $380,000 revenue, $52,000 net operating income, $34,000 existing annual debt payments, FICO 641, and leases everything. DSCR is 52,000 ÷ 34,000 = 1.53. Requested the same $150,000.

Applicant A is approved at a bank at around 9% APR with no collateral required beyond a blanket lien, because the coverage is overwhelming and the equipment offers a fallback.

Applicant B is declined by the bank. Time in business is under two years, the FICO is below the 680 floor, and adding a $37,000 annual payment on a five-year term would push DSCR to 0.80 — the business would not cover its own obligations. Going to an online lender, B is offered $60,000 rather than $150,000 at roughly 24% APR, sized so that the new payment keeps total debt service below net operating income.

Same request, same amount. Different profile. The gap between A and B is not revenue — it is trading history, coverage headroom, and credit. Those are the things to fix before applying.

Requirements by Loan Type

Risks and Points of Caution

• Applying everywhere at once. Multiple hard credit pulls in a short window compound. Rate-shop within a 14-45 day window, which scoring models treat as a single enquiry for auto and mortgage products, or gather soft-pull pre-qualifications first.
• Overstating revenue. Lenders verify against bank statements and tax returns. A mismatch between what you claim and what the returns show ends the application and can flag the file.
• Ignoring the personal guarantee. Owners routinely sign without reading the scope. If the business fails, this is the clause that follows you.
• Assuming a decline is final. A decline at a bank often means the profile is right for a different product. Ask the lender which requirement failed and address that specific gap.
• Using a broker without checking fees. Some brokers charge the borrower a fee on top of the lender's origination fee. Ask directly whether the broker is paid by the lender or by you.

What to Do Before You Apply

1. Pull your personal credit report and your business credit file privately. Fix errors first.
2. Calculate your DSCR from last year's figures. Below 1.25 means the loan will be sized down or declined.
3. Collect every document on the checklist above and check the dates are current.
4. Match the product to your profile: under two years trading means online lending, equipment finance or microloans, not a bank term loan.
5. Get pre-qualified with soft pulls from three or more lenders before any hard application.
6. Read the guarantee, lien and covenant clauses in the term sheet before signing anything.