Small Business Loan Requirements: Q&A

Lenders receive thousands of small business loan applications every year, which means they have strict criteria for who will qualify and who won’t. It’s a lot of effort to apply for a loan, so you need to give your business the best chance of succeeding before filling out the paperwork. 

To help, we’ve gathered some of the most common questions that lenders ask, a brief explanation of each one, and tips to improve your chances of qualifying.

Not all lenders will require every piece of information we cover below. Ultimately, they’re looking to understand the risks of lending to you and reassurance that your small business will be able to repay. Even if they don’t need all of this detail, it’s still good to have it, as it will help you stay on top of your business and better manage your money.

Let’s get into it.

How Much Do You Want to Borrow?

It’s important to calculate your exact financial needs so you can apply for a realistic amount:

  • Define the goal you want to meet with the money you are borrowing.
  • Complete a cost analysis and breakdown of how much is needed for each step.
  • Review the cost analysis with other experts.
  • Compare a few different scenarios for how you will account for costs and use the most likely business case.

What Is The Exact Purpose of the Loan?

You will need to show the lender how your small business will use the money: 

  • Take your cost analysis and breakdown and assign each piece of the borrowed money to specific steps.
  • Provide a deep level of detail of exactly how you’re going to spend the capital.
  • Sort the total loan amount into spending categories, with descriptions of each one.

How Long Have You Been in Business?

Most lenders will want to see a business history of at least two years, and longer is better:

  • Delay applying for a loan until you have a reasonable amount of time in business.
  • Provide accurate financial records that show your success in business.
  • If you want to apply with a business that’s been around for fewer than two years, look for specialized lenders.

How Good Are Your Personal and Business Credit Scores?

You will need to have a good credit history, both for your personal finances, and, ideally, a separate credit history for your business. 

  • Before you apply for a loan, ideally when you first start your business, apply for an Employee Identification Number or a Tax Identification Number. This will allow your business to build its own credit history.
  • Build up your business credit score by having separate business bank accounts, staying up to date with your repayment commitments, getting credit from vendors, and using the same approach as boosting your personal credit score.
  • Maintain an excellent credit history for yourself—don’t take on too much debt, make your repayments on time, have established credit accounts, and avoid any derogatory marks.
  • Check your credit score with a free online service, and correct any errors in your credit history.

How Financially Healthy Is Your Business?

The aim of your existing and projected finances is to assure a lender that you are responsibly managing your business, and that it’s in good financial health. We have a complete “Business Health Check Questionnaire” that can help you stay on top of things, and we’ve included specifics below.

How Much Revenue and Profit Has Your Business Made Each Year?

You will need to show that your small business can repay your loan. You can demonstrate that to a lender:

  • Provide a profit-and-loss report, prepared by an accountant, that shows your business income, expenses, and profits.
  • Provide a balance sheet to show the current assets, liabilities, and money that you have.
  • Provide a cash flow statement to show how money is moving through your business.

What Are Your Projected Business Revenues, Expenses, and Profits?

Your lender doesn’t just want to know how your business has performed in the past, but how you expect it to perform in the future:

  • Create realistic forecasts for how your finances will look over the next one to three years.
  • Include your plans, expectations, and risks in the projected amounts.
  • Demonstrate how the money you are borrowing contributes to these projections.

What Are Your Current Credit and Loan Repayment Commitments?

If you’re already making repayments on loans or other business (or personal) debt, you will need to disclose this information:

  • Establish the repayments and commitments you have to current lenders.
  • Create a “Business Debt Schedule” that lists out all of your loan details including the amount borrowed, the age of the loan, interest, and how much you repay each month.
  • Ensure that you have the spare cash flow to meet your proposed new loan repayments.

Are You Able to Provide Collateral?

Collateral is a personal or business asset that you offer to secure the loan. Here’s how it works:

  • You identify an asset that is worth as much as or more than the amount of money you are asking to borrow.
  • You provide a guarantee to the lender that means they will be able to sell the asset in the event that you cannot repay.
  • If you cannot repay, the lender sells the asset and uses the proceeds to settle your business debt.

Although you can still get financing even if you can’t provide collateral, a secured loan will increase your chances of qualifying.

Do You Have a Detailed Business Plan?

A detailed, well-documented business plan shows you have a business model, structure, research, and analysis to support financial responsibility and repayment. Your business plan should include:

  • Information on the sector and industry you operate in and marketplace-level strengths, weaknesses, opportunities, and threats.
  • Solid financial projections.
  • Details of your business model.
  • Risks and assumptions for your business model and finances.
  • An overview of your products and services, both current and planned.
  • An analysis of your marketplace and product fit.
  • The competitive landscape for your business offerings.
  • Your marketing and advertising plan.
  • How your business functions operationally.
  • A management team summary.

Can You Provide Documentation to Support Your Financial Claims?

A lender will want to see proof that your finances are what they say they are. This could include:

  • Tax returns for yourself and your business.
  • Bank and credit card statements.
  • Details of existing loan balances and repayments.
  • Credit histories and reports for you and your business.

What Other Business Documentation Do You Have?

There are other important documents that can reveal facts about your business:

  • Your articles of organization or incorporation if you have formed an LLC or corporation.
  • Your operating agreements, bylaws, and organizational minutes.
  • Your business licenses and operating permits.
  • Your Employer Identification Number.
  • Any legal contracts and agreements you have in place with other third parties.
  • Whether you are affiliated with or own any other businesses.

This list will provide you with a great starting point for qualifying for a small business loan. Start gathering together your information and documents now, so you’re ready to answer your lender’s questions. For more help with business loan requirements, see our guide here, and when you’re ready to apply, our tool will match you with the best lenders available.