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Essential Guide to Small Business Funding Small Business Funding

Small Business Loan Requirements

There is no “one size fits all” list of small business loan requirements. Like all things small business funding, the exact eligibility and approval requirements of your funding will depend on the specific type of financing you’re seeking, as well as the type of lender you’re working with.

This guide will:

  • Compare how requirements vary by lender type
  • Explain 8 of the most common small business loan requirements
  • Provide a list of documentation you may be required to submit

Let’s jump in!

How do requirements vary by lender type?

In our guide to how small business loans work, we took a look at three main types of lenders: traditional lenders, SBA loans, and alternative lenders. Each type of lender has different application requirements. Here’s a quick look at how they compare:

Traditional lenders

Traditional lenders such as banks or credit unions have strict eligibility requirements. Most traditional lenders will only fund established businesses, and will focus their review heavily on your personal and business financial history. These lenders will require thorough documentation when evaluating your application, and the process can take weeks or even months.

SBA loans

SBA loans have the most restrictive requirements. Applicants must have very strong personal credit and business revenue, and must be current on all government loans with no defaults (including federal student loans or government-backed mortgages). You must be operating a for-profit business, and you cannot be on their list of ineligible businesses. SBA loans also require the most documentation, and will take the longest to process with the lowest chance of approval.

Alternative lenders

Alternative lenders have the most lenient requirements, with greater flexibility to approve loans for applicants that may be weak in one area (such as credit score) but who are strong in another (such as cash flow). These lenders will often look at other criteria as well, such as your online reputation. However, because the requirements are more forgiving, rates are often higher.

Instead of requiring months or years worth of statements and documentation, many alternative lenders will request access to your bank account information so they can review your account history directly. This significantly streamlines the application and approval process—some lenders can even approve funding in as little as one business day.

GREENBOX TIP: While alternative lenders may have more flexible requirements than others, the strongest applications always meet or exceed all requirements, regardless of loan or lender type.

8 Common Small Business Funding Requirements

When evaluating your eligibility for small business funding, lenders will typically look at eight main factors:

  1. Credit score
  2. Collateral
  3. Cash flow
  4. Current debt
  5. Time in business
  6. Industry
  7. Tax returns
  8. Loan purpose

Different types of lenders will place varying degrees of emphasis on each of these criteria. Let’s take a closer look at each of these factors.

1. Credit score

Importance
Traditional Lenders: 4.5/5
SBA Loans: 5/5
Alternative Lenders: 3/5

All lenders will evaluate your credit score. Higher credit scores typically result in better loan terms and rates.

Traditional lenders will require a credit score of 600 or higher, while SBA loans will require very strong credit scores of 650 or higher. Alternative lenders have lower credit score requirements, and are often ideal for businesses with low or no credit. Most lenders prefer your FICO score over a report provided by other credit bureaus such as TransUnion, Equifax, or Experian.

Traditional lenders and the SBA will evaluate both your business and personal credit scores. Your business credit score is based on your history of payments to suppliers and other lenders, but can also be based on factors like your industry, business size, and revenue. Your personal credit score, on the other hand, evaluates your ability to repay personal debts, such as credit cards, mortgages, and car loans. If you have yet to establish business credit or have a low business credit score, lenders will place more consideration on your personal credit score when evaluating your eligibility.

GREENBOX TIP: If you have low personal or business credit or don’t have business credit, don’t worry—there are still lots of funding options available to you from alternative lenders like Greenbox Capital®, including merchant cash advances or invoice factoring. Learn more about our services.

2. Collateral

Importance
Traditional Lenders: 4/5
SBA Loans: 5/5
Alternative Lenders: 2/5

Loans that are secured by collateral such as real estate, equipment, or invoices, present less risk to the lender. As a result, providing collateral can help you get approved with better terms and lower fees.

Collateral is required for commercial real estate loans, equipment financing, and invoice factoring, but it is not required for all loan types or lenders. If you don’t have collateral to offer, alternative online lenders are likely your best source of small business funding.

3. Cash flow

Importance
Traditional Lenders: 4/5
SBA Loans: 5/5
Alternative Lenders: 4/5

All lenders will evaluate your “debt-to-income” ratio when assessing your funding application, with your income primarily determined by your business’s cash flow. Lenders will evaluate your cash flow by reviewing detailed financial and bank statements, including:

  • Balance sheets: These will summarize your business’s financial health, including assets, liabilities, and equity.
  • Profit and loss statements: These statements will help lenders evaluate your annual revenue and profits. Year-to-date documentation is typically required, updated within the last 60 days.
  • Bank statements: Bank statements will give lenders insight into how you manage your cash. Lenders usually ask for a minimum of four months of statements, but may ask for up to two years.

Steady cash flow tells lenders that you are in a position to manage your loan payments. Traditional lenders will have stricter profitability requirements, while alternative lenders may focus more on your monthly revenue.

GREENBOX TIP: Businesses that deal with invoicing and have longer accounts receivable periods often struggle with cash flow. This can make it tough to access some small business funding such as term loans, but is ideal for other loan types like invoice factoring which allow you to leverage your unpaid invoices in exchange for cash up front. Learn more about invoice factoring.

4. Current debt

Importance
Traditional Lenders: 5/5
SBA Loans: 5/5
Alternative Lenders: 4/5

Your current debt load measures your monthly debt payments against your monthly gross income. This is the “debt” portion of your debt-to-income ratio, and includes balances on your line of credit, business credit cards, and any other loans or financing you’ve received.

Businesses with too much debt will have trouble getting approved by traditional lenders, and even some alternative lenders—most lenders require a debt-to-income ratio of 50% or lower.

GREENBOX TIP: If you already have a business credit card or line of credit and you want to apply for more funding, try to keep your balances under 10% of your credit limit.

5. Time in business

Importance
Traditional Lenders: 5/5
SBA Loans: 5/5
Alternative Lenders: 3/5

New businesses are unproven and therefore considered riskier than established businesses. As a result, many traditional lenders simply won’t fund businesses that have been in operation for less than two years.

Businesses that have been in operation for less than 2 years can often access funding from alternative lenders. These lenders have much lower time in business requirements—sometimes as low as 5-6 months.

6. Industry

Importance
Traditional Lenders: 4/5
SBA Loans: 5/5
Alternative Lenders: 1/5

Some industries are considered riskier than others, which can negatively impact your chances of approval when applying for funding from traditional lenders or SBA loans. Traditional lenders also have policies that prevent them from funding businesses in certain industries, such as firearms dealers or cannabis businesses. Seasonal industries or industries that are in decline may also have trouble receiving the funding they need through these channels.

While they can’t fund all industries, alternative lenders are able to fund more industries than traditional lenders, including high risk, seasonal, and other niche industries traditional lenders aren’t able to fund such as cannabis businesses.

If you aren’t sure what industry your business falls into, check out the Standard Industrial Classification (SIC) codes on the North American Industry Classification System (NAICS) website.

7. Tax returns

Importance
Traditional Lenders: 4/5
SBA Loans: 5/5
Alternative Lenders: 1/5

Traditional lenders will likely require at least two years of your personal tax returns, especially if you are a sole proprietorship or are in a partnership where your business’s profits and losses are reported on your personal tax return. Business tax returns will also be required for LLCs that are taxed as corporations.

Alternative lenders, on the other hand, may not require your tax returns at all.

8. Loan purpose

Importance
Traditional Lenders: 4/5
SBA Loans: 5/5
Alternative Lenders: 3/5

Some lenders, including alternative lenders, will require you to provide a written or verbal statement describing how you intend to use your funding. Be as specific as possible, with clear explanations for how you plan to use your loan and how you play to pay it back.

Documentation You May Need

All lenders will require you to submit some documentation in order to process your application. Traditional lenders and SBA loans will require more documentation than alternative lenders.

The sooner you can provide any requested documentation, the faster your application will be reviewed and approved. Compiling these documents can be time consuming and difficult, so before you submit your initial application, do your best to prepare any potential documentation that might be requested to help streamline the process.

If you can, collect the following:

Personal documentation

  • Copy of your driver’s licence
  • Other ownerships and affiliations: This includes your ownership in other businesses, as well as your other affiliations such as board member or consultant positions. This information will disclose potential conflicts of interest. The number of owners in a business can also impact your eligibility for certain types of funding, especially for SBA Loans.

Operational documentation

  • Proof of ownership
  • Articles of incorporation
  • Commercial lease: This will prove that your business is able to use the property for as long as the duration of the loan.
  • Entity type: Knowing how your company is organized (eg. sole proprietorship, partnership, or LLC) can give lenders insight into how your business is managed.
  • Employer Identification Number (EIN): Your EIN is like a social security number for your business. You can easily apply for one online.
  • Legal contracts and agreements: Existing legal contracts and agreements could impact your financial position or create legal issues down the line. This includes contracts with major suppliers or third parties, corporate bylaws, LLC operating agreements, partnership agreements, franchise agreements, sales agreements, commercial real estate purchase agreements, and equipment purchase agreements.
  • Business license/permit: This will prove that your business is legal and registered to operate with your state or jurisdiction.
  • Business plan: Include a company description, product or service description, management team information, industry analysis, your plan for your facilities and operations, marketing strategy, and SWOT analysis.

GREENBOX TIP: Unlike SBA loans and traditional term lenders, alternative lenders will not require you to submit a business plan. They may still require a purpose statement for how you intend to use your funding.

Financial documentation

  • Personal and business tax returns
  • Personal and business bank statements
  • Balance sheet and income statement
  • Financial projections or revenue forecast
  • Collateral documentation
  • Payroll records
  • Accounts receiving/payable aging reports: These reports will show a lender how efficient your business is at receiving payment for goods and services, as well as paying its own bills. The accounts receivable aging reports will indicate the number of overdue invoices and length of time by which they are overdue—too many shows your business isn’t good at collecting payments. The accounts payable aging report will indicate the number of invoices from other businesses that you haven’t paid—too many shows you aren’t good at managing your expenses.
  • Business debt schedule for outstanding loans and other debts: This advises lenders of the current state of any debt you owe, including amounts, monthly payments, interest, and payment dates.

Small business loan requirements comparison chart

Traditional LendersSBA LoansAlternative Lenders
CreditHigh credit scores (600+)Very strong credit scores (650+)Loans for low or no credit are available
Cash flowGreater emphasis on credit history over cash flow

Most lenders require minimum monthly revenue of $7,000, net operating income 1.25x greater than your expenses
Strong cash flow and profitability are requiredGreater emphasis on cash flow over credit history
Collateral Required for some types of fundingRequired for all SBA loansNot required on many funding options
Time in business2+ yearsNo fixed time in business requirement, but established businesses are preferred5+ months
Debt50% or lower50% or lowerTBD
IndustryLow risk, growing industries preferredIneligible industries include life insurance companies, financial businesses, and real estate investingLoans for high risk or declining industries are available
Tax returnsRequired up to 2 yearsRequiredNot required
Loan purposeRequiredRequiredVerbal loan purpose required

Wrapping Up

The specific eligibility requirements for small business funding will depend on the specific type of funding you’re applying for, as well as the type of lender you’re working with. As a general rule:

  • SBA loans have the strictest eligibility requirements, approving applicants with very high credit scores and strong financial histories
  • Traditional lenders like banks and credit unions have high eligibility requirements, preferring to fund larger businesses who have been in operation for at least two years.
  • Alternative lenders have the most flexible eligibility requirements, making them ideal for applicants with low or no credit, new businesses, and loans for smaller amounts.

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