Navigating business loan requirements can be a daunting task, with a myriad of stipulations and paperwork involved.
This ultimate guide demystifies the intricacies of applying for capital, providing you with a clear roadmap for understanding loan prerequisites and preparing essential application documents.
Streamline your borrowing experience and maximize your chances of success!
Business Loan Application Checklist
Before starting a commercial loan application, make sure you have the following.
Most common requirements:
- 2+ years in business (or 12 months with CF).
- The lender works with your industry.
- Your required loan amount matches the lender's offerings (at CF, we offer from $5,100 to $25,000).
- The lender doesn't restrict the use of proceeds you have planned.
- A personal credit score of 650+ (or 580 with CF; we also approve applicants with no previous credit history).
- A business credit score of 80+
- Annual business revenue of $100,000 (or $30,000 with CF).
- You have collateral (at CF, we don't ask for collateral).
- You can sign a personal guarantee.
- A Debt-To-Income Ratio (DTI) of 28% or lower.
- A Debt-Service Coverage Ratio (DSCR) of 2 or higher.
Our requirements are very easy to meet.
Documents that lenders usually ask for:
- *Several months of personal and business bank statements (at CF, we will ask you to link your bank account to Plaid, a secure app that makes the process faster and easier).
- *1-2 years of personal and business tax returns.
- *Business registration, articles of incorporation, bylaws, or operating agreements.
- *Business licenses and permits.
- *Employer Identification Number (EIN).
- *Social Security Number (SSN) (at CF, if you don't have an SSN, you can use your ITIN).
- *Financial documents, like profit and loss statements, balance sheets, cash flow statements, and income statements.
- *Accounts payable and receivable.
- *Details of your other debts and payoff letters from alternate lenders, if applicable.
- Business plan.
- Legal contracts and agreements.
- *Driver's license or other type of official photo ID.
- *Proof of ownership.
- *Proof of no tax liens or civil judgment plans.
- Business leases and insurance plans.
- Payroll records.
- Information on your collateral, such as a valuation.
- A resume that shows relevant management or business experience.
- Financial projections if you have a limited operating history.
We won’t ask you for these many documents, only the ones marked with an asterisk.
Apply For A Business Loan!
If you want to learn more about the importance of each document and requirement or more details about each one, keep reading.
10 Most Common Business Loan Requirements
Meeting these requirements will determine if you get approved, so ensure you fully understand each before applying!
1. Time In Business
Most lenders will ask you to be in operation for at least two years to qualify for a loan.
This is because lenders understand that a business with a longer track record is more likely to be stable and capable of repaying a loan than a newer business.
Unfortunately, this makes it difficult for smaller and newer businesses to get the funding they need.
We only require that your business has been in operation for at least 9 months.
2. Business Industry And Size
Some lenders may be unwilling to advance money to companies in specific industries or sectors.
Lenders consider some industries higher risk than others due to various factors such as:
- market volatility
- regulatory challenges
- higher failure rates
The list of denied industries could include:
- real estate
- adult entertainment
Sometimes banks don’t lend to nonprofits either because they are dependent upon donations.
On the other hand, size requirements also help lenders to categorize loans and offer different products for different-sized businesses
Each type of loan has different risk and return profiles for the lender. It's a way for lenders to ensure they're offering the right product to the right business, which helps manage their overall risk profile.
3. The Loan Amount
The amount of money you plan to borrow is crucial in determining whether the bank will approve your application.
There are two reasons for the loan amount being among the most critical small business loan requirements:
Setting a maximum loan amount would ensure a cap on the lender's risk. Similarly, each lender's internal rules would stipulate a floor below which it would not lend.
The reason is that every loan involves processing, underwriting, and servicing expenses. These remain the same regardless of the size of the amount the lender advanced. Consequently, low-value loans can be uneconomical for the lender.
Business's Cash Flow
The financial institution wants to be sure that your business can generate the required cash flow to repay the borrowed amount.
Before applying, you should work out the monthly installment you can comfortably afford.
4. The Use You'll Give The Money
The lender would like to know how you'll spend the loan; they might even have use-of-proceeds restrictions.
In general, lenders put these restrictions in place to ensure that you use the borrowed funds in a way that aligns with their:
- risk tolerance
- business model
- ethical standards
- legal and regulatory requirements
You should be ready to provide an explanation that covers the following points:
- How will you use the funds?
- Will your investment give you a good ROI?
You can not use business loans for personal expenditures.
5. Your Credit Scores
Personal Credit Score
Most banks and financial institutions will consider your personal score even when you apply for a business loan.
It provides them with information about how you meet your financial commitments.
If you are trying for an SBA (Small Business Administration) or bank loan, you stand a better chance of receiving a positive reply if your credit score is at least 650 or more.
Other lenders accept lower scores.
Business Credit Score
Many lenders will also check your business credit score to decide on your loan application.
This credit score ranges between 0 and 100, calculated by the three business credit bureaus: Experian, Equifax, and Dun & Bradstreet.
An excellent business credit score is above 80.
6. Annual Revenue
Lenders consider your sales among the more critical small business loan requirements. They want your revenue to meet a particular threshold. Some lenders stipulate that your company must have annual revenues of at least $100,000.
This is because good sales indicate you will have the cash to repay your borrowed money.
With your sales, lenders can also calculate the loan amount they will approve. For instance, a lender may be willing to advance between 10% and 12% of your revenue.
However, if your profit margins are slim and most of your funds go towards buying raw materials and paying other expenses, you may not be able to get loan approval
even if your sales volumes are rising.
You can apply for a loan from Camino Financial if your company only generates sales of $30,000 (or $2,500 monthly).
Some lenders will ask for an asset as security, also called collateral. If so, they're offering secured small business loans.
The collateral assures them that they will not lose money if you default. If you fail to repay, they will repossess and sell the asset.
We don'task for collateral.
8. Personal Guarantee
A personal guarantee is a commitment made by the applicant to personally pay back the business loan if the business fails to do so. If a company defaults on a loan, the lender can pursue the business owner's personal assets to recoup the loan amount.
Lenders often require it to lower the risk associated with lending money, especially for smaller businesses.
Some loans might require only collateral, others only a personal guarantee, and others both, depending on the nature of the loan and the lender's assessment of risk.
9. Debt-Service Coverage Ratio
The debt-service coverage ratio (DSCR) measures how much cash flow you have available to pay the principal and interest of a loan.
It helps determine your ability to cover loan payments and directly addresses the risk of lending money.
Lenders will expect your DSCR to be two or higher.
Here's how to calculate it:
DSCR = Net operating income / Total debt service
10. Debt-To-Income Ratio
The debt-to-income ratio (DTI) is a measure that compares an individual's or business's total monthly debt payments to its gross monthly income.
This ratio helps lenders assess borrowers' ability to manage and repay debts by comparing their total monthly debt payments to their gross monthly income.
Lenders might also ask you to disclose all your other debts and to be current with them.
Lenders will expect your DTI to be 28% or lower.
DTI = Monthly debt payments / Gross monthly income
Apply For A Business Loan!
20 Documents Needed To Apply For A Business Loan
Here are the most common business loan documents lenders will ask a small business owner.
It’s a great idea to keep digital copies of these documents and save them on a cloud drive like Dropbox or Google Drive. This way you can access them quickly anywhere, anytime.
1. Bank Statements
Your lender will want to know how much money you deposit into your bank monthly and how you use it.
They will also look for:
- The official name of your business on your bank statement (you shouldn't use a personal bank account).
- The figures in your business bank statements and other financial statements should be consistent. If there is a difference between the two, you should be able to explain why.
You won't need to find, collect and share documents personally or via fax. You only need to securely connect your bank account with Plaid, a secure application used by hundreds of banks and financial institutions.
In addition to your bank statements, the lender might require proof of positive balances.
2. Tax Returns
You will have to provide both business and personal tax returns. They are fundamental requirements because they help the lender better understand your financial situation.
You will only need to share personal tax returns if you own a pass-through entity (like an S corporation, a sole proprietorship, or a partnership).
3. Business Structure Registration
You will have to tell the lender how you structure your business. This helps the lender better understand the business, its owners, its legal obligations, and its overall risk profile.
These are the documentation you need to share for different types of business structures:
- Sole proprietorship: Proof of DBA Registration.
- Partnership: Business partnership agreement.
- Limited liability company (LLC): Articles of organization and the LLC operating agreement.
- Corporation: Articles of incorporation, Bylaws, Written Action of Incorporator, Agreements between shareholders.
4. Business Licenses And Permits
These documents are critical as they help establish if you comply with the law. They tell your lender that you can legally operate the business.
They also show proof of ownership.
Putting a little effort into finding out about your business's different licenses is a good idea. Noncompliance could lead to the lender refusing your loan application. It could also expose your company to penalties as well as legal liability.
Ensure that your business licenses and permits have not expired.
5. Employer Identification Number (EIN)
This is a nine-digit number assigned by the Internal Revenue Service (IRS). It is also called the Federal Employer Identification Number (FEIN) or the Federal Tax Identification Number.
In a way, it is a Social Security number for businesses, and lenders use it similarly to:
- confirm identity
- check creditworthiness
- ensure regulatory compliance
Corporations and partnerships need to obtain the EINs.
Sole proprietorships need an EIN only if they have employees.
6. Social Security Number (SSN)
Most lenders will ask for your SSN.
This number is an important tool for lenders to assess the creditworthiness and verify the identity of the individual business owner(s), which is often a crucial part of the business loan underwriting process.
Alternative: Individual Taxpayer Identification Number (ITIN)
If you don't qualify for an SSN, some lenders accept ITIN.
It's generally used by immigrants who do not meet the requirements to have an SSN and need to file returns and pay taxes.
The Government issues the ITIN regardless of immigration status.
That said, very few financial institutions accept this alternative number.
We accept applicants with an ITIN number if they don't have an SSN.
7. Financial Documents
One of the business loan requirements that you have to fulfill is to share your financial statements.
Don’t confuse financial statements with bank statements.
These documents will provide details about your company's financial performance in the past.
Prepare to share 2-years' worth of these documents:
- Profit and loss statements
- Balance sheets
- Cash flow statements
- Income statements
- Financial projections
Lenders may sometimes request a bank conference call to validate or discuss specific transactions or the overall financial situation of the borrower. Such calls are typically formal conversations involving the lender, the borrower, and the bank.
8. Accounts Receivable Aging And Accounts Payable Aging
These two reports are particularly interesting to the lender because they provide information about how you manage your working capital.
Lenders will require accounts receivable aging only for a firm that operates in the business-to-business (B2B) segment.
If your clients delay payments regularly, that will affect your cash flow and profitability.
Your accounts payable aging report provides the lender with information about the number of days of credit you receive from your suppliers.
It is to your advantage if your suppliers allow you generous credit terms. However, if you regularly delay payments beyond the stipulated credit period, it will reflect poorly on your company.
9. Details Of Your Other Debts And Payoff letters from alternate lenders
The lender will require you to provide information about other current debts.
Most financial institutions consider this one of the vital loan requirements because it tells them if you are in a position to meet all your obligations.
They will likely turn your loan application down if they think your debt burden is higher than you can handle.
The payoff letter is a tool to help the new lender accurately assess the borrower's financial situation and the potential risks involved in issuing a new loan.
10. Business Plan
A good business plan is a document that details your business goals and how you plan to meet them.
The document should briefly describe your business, how you market your products or services, and how you plan to increase sales volumes.
Here are some of the specific details most business plans have:
- Your product's or service's attributes. What are you selling? How is it better than what the competition offers? You need to convince the lender about the merits of your product and its ability to retain or increase its market share.
- Customer analysis. Describe your current market and how you plan to increase sales.
- Supply chain. How do you source your raw materials and supplies? Could prices rise and affect your profitability?
- Industry analysis. Entrepreneurs should be familiar with the sector in which they operate.
- Your finances. How will you raise the money for your expansion? How much money have you invested in the business?
- Cash flow. Most lenders want to know how you use your company's money from business operations and other sources.
Even if the lender of your choice doesn't ask for one, it's a good practice to prepare yours. It will help you calculate precisely how much you need to borrow. It also enables you to calculate the Return On Investment (ROI)
11. Legal Contracts And Agreements
Many lenders will want to know if you have any contracts and agreements with other businesses, like:
All these documents help them understand if you are serious about doing business and what your present and future look like.
- Contracts with suppliers
- Partnership agreements
- Corporate bylaws
12. Official Photo ID
This helps lenders verify the identity of the individual applying for the loan.
The types of photo IDs that business lenders accept vary from lender to lender, but some of the most common include:
- Driver's license
- State ID card
- Military ID
- Foreign passport
Some lenders may also accept other forms of ID, so it's always best to check before applying.
Here are some additional things to keep in mind about this document, it must:
- be current and not expired
- be government-issued
- show your full name, date of birth, and photograph
If you cannot provide a government-issued photo ID, you may be able to provide other documentation, such as a birth certificate or a social security card. However, this may not be sufficient for all lenders.
This refers to who owns the business. It typically includes the names and contact information of all owners and the percentage of the company each owns.
In the case of corporations, it may also include information about stock ownership.
If there are multiple owners, the documents you can use to demonstrate ownership are:
- Articles of incorporation
- Operating agreement
- Partnership agreement
- Schedule K-1 tax form
- DBA certificate
- Business licenses and registrations
14. Proof of no tax liens or civil judgment plans
Lenders often require proof of no tax liens or civil judgments because these legal issues can significantly impact a borrower's loan repayment ability.
By requiring proof of no tax liens or civil judgments, lenders can better ensure they are lending to financially stable businesses capable of repaying their loans.
Other documents a lender might require
16. Business leases and insurance plans.
17. Payroll records.
18. Information on your collateral, such as a valuation or an Accounts Receivable Aging report.
19. A resume that shows relevant management or business experience.
20. Financial projections if you have a limited operating history.
Apply for a business loan now!
Choose A Lender With Fewer Requirements
Many small business owners get discouraged when they learn they have to arrange for documentation from various sources. This takes time and effort.
Fortunately, we have minimal requirements.
Discover how Camino Financial business loans work
- You can apply with your SSN, and if you don't have one, your ITIN
- Your business needs to have been active and registered for at least nine months
- A minimum annual income of $30,000 (or $2,500 monthly)
- Be current with outstanding debt
Check out the charts below to compare the list of needed documents and requirements for a business loan and compare how Camino Financial fares against other lenders:
Apply for a business loan now!
|DOCUMENTS: other lenders vs. Camino Financial
||✔️ (electronically through Plaid)
||✔️ (you can register your business during our process if you haven't yet)
|Licenses and permits
||❌ (You can apply with an ITIN, but only if you do not have an SSN)
|Accounts payable and receivable
|Details of your other debts
|Legal contracts and agreements
|Official photo ID
|Proof of ownership
|Proof of no tax liens or civil judgment plans
|Business leases and insurance plans
|Information on your collateral, such as a valuation
|A resume that shows relevant management or business experience
|Financial projections if you have a limited operating history
How To Apply For A Business Loan
- Decide on a loan amount. The amount needs to meet your business needs in a range you can repay comfortably.
- Select a lender. Search for a financial institution with requirements you can meet.
- Apply for the loan. Most lending institutions allow borrowers to apply online, while others require you to apply in person. All applications ask for personal and business information, such as your legal name, loan amount and purpose, business address, personal address, phone numbers, and more.
- Submit the documentation. If the lender pre-qualified you, they would ask for some additional documents. If you applied with an online lender, you could send them electronically.
- Sign the contract and receive the capital. If approved, the lender will send you a loan proposal. If you agree with the terms, sign the documents and wait for the funds.
The loan term should match the period you will generate the ROI. You don't want to be in a position where you are repaying a loan that you took for an asset that isn't generating revenue any longer.
Tips To Qualify And Get Approved For Small Business Loans
- Work hard to build both your personal and credit scores.
- Review your credit reports and, if they have errors, contact the credit bureaus before applying for a loan to take steps to have them reviewed and removed.
- Have all your documents beforehand.
- Write a strong business plan, even if the lender doesn't ask for one.
- Don't borrow more money than you can safely repay.
- Make sure your business meets the loan requirements before applying for a loan.
- Be transparent about the information you provide on an application. It's better to give too much information than not enough.
Get The Capital You Need To Grow Your Business
If your business needs a cash infusion, consider taking a loan from Camino Financial.
We have more flexible requirements than traditional lenders.
The application process to obtain small business loans from Camino Financial is more straightforward than most online lenders.
In the time you take to gather all the documents other lenders require, you could have in hand the cash you need to grow your business
by choosing Camino.
All you have to do to start is submit your loan application. It will take only a few minutes, and if you're approved, you'll receive the capital in several days.
Apply For A Business Loan!
How hard is it to get a business loan?
Qualifying for a loan depends on the type of loan you apply for and lender requirements.
Lenders look at a business's credit history, how many years they've been in business and other factors before approving a loan.
Their rates, charges, and loan amounts are directly proportional to the degree of risk they assume and go up and down accordingly.
Is collateral needed for a business loan?
Secured loan business loan requirements state that you must provide collateral. On the other hand, unsecured business loans do not.
In place of collateral, a lender may request a personal guarantee, which means the applicant will personally repay the loan if the business defaults on loan payments.
Do business loans require a down payment?
Lenders offering online loans generally do not require a down payment.
Be careful if a lender asks you to pay a fee in advance or will charge you a certain amount to approve you. They could be fraudulent lenders going after your money.
What size loan can I get to start a business?
There is no one-size-fits-all answer to this question, as the amount of money you can borrow to start a business will vary based on many factors, including your credit score, the size of your business, and the purpose of the loan.
However, some lenders may be willing to loan you up to $20,000 for a small business startup.
What are the requirements for a startup business loan?
Startup loans are the alternative you need because they have more lenient requirements:
- Have a new business or a business idea (you'll require a business plan)
- Personal bank account and tax returns
- Good personal and business credit scores
- Business registration and licenses (if you've already started the business)
- Employer identification number
- A minimum income (the amount they'll require depends on the lender)
- Collateral (if you want a secured loan)
- EIN and SSN
- Minimum credit score
What are the most common types of business loans?
These are the most common types of business loan options:
- Term Loans. They provide a lump sum of cash upfront, which is then repaid with interest over a set period, or term.
- SBA loans (which are government-backed). Generally, SBA loans have stricter regulations, flexible terms, and lower interest rates.
- Business Line of Credit. A revolving line of credit that allows businesses to borrow up to a specific limit and only pay interest on the amount borrowed.
- Merchant cash advances (MCA). You receive cash for a percentage of your business's future credit and debit card sales. They charge a very high APR.
- Invoice Factoring. They involve selling your unpaid invoices to a lender who gives you a percentage of the invoice value upfront and the rest when the client pays minus fees.
What's the difference between secured and unsecured loans?
- Secured business loans. This financing option requires you to pledge collateral.
- Unsecured business loans. They don't need collateral. Because the lender assumes more risk, they might charge higher interest rates and offer smaller loan amounts.
What are the pros and cons of getting a business loan?
Pros of getting a business loan:
Cons of getting a business loan:
- It allows businesses to acquire the necessary funds for expansion, working capital, equipment purchase, or other growth initiatives.
- It prevents dilution of ownership stake, unlike equity financing.
- The interest paid on a business loan is tax deductible.
- Loans must be repaid with interest, which can strain cash flows and profitability.
- Lenders often require collateral, which puts the borrower's assets at risk.
- Not all businesses qualify for loans; factors such as credit score, business history, and profitability come into play.
*Camino Financial's terms and requirements can change without notice.