ppp eXTENDED TO MAY 31st 2021!

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1. Time in Business

First, when you apply for small business loans, every lender will ask how long you have operated your business. The longer you’ve been in business, the better it is for your application because it shows a lender that your business has had long-term success. Ultimately, the threshold that you should keep in mind is two years. If your business is under two years old, it doesn’t make it impossible to get a business loan, but it does limit your options. Although banks may be less likely to lend to business under two years old, online lenders will often have more flexible requirements. This being said, if you have a newer business, the best thing you can do to strengthen your loan application is to have a solid business plan (more on this below) showing how you plan to grow revenues and profits in the next three to five years. Similarly, you’ll want to highlight other strong business loan application requirements you meet, such as a solid personal credit score and any collateral you can offer up.

2. Business Credit Score

One of the most important business loan requirements you’ll need to qualify for financing is your business credit score. Lenders will ask for your business credit history and financial information to assess the likelihood that you’ll pay back your loan—if your personal finances are strong, lenders assume this means you’ll be able to manage your business finances as well. This being said, your personal credit score will not only influence whether or not you’re approved for a loan, but it will also play a role in determining your interest rate - a soft credit pull will typically be sufficient for a lender to pre-approve your loan.

3. Annual Business Revenue and Profit or Bank State

Your business’s annual revenue and profits will also be one of the most common small business loan requirements you see across different lenders. In order to evaluate this information, lenders will ask you to provide your profit and loss statements as part of your application.

Typically, lenders will want to see both a year-to-date profit and loss statement, updated within the past 60 days, and statements from the previous two years. This being said, however, the ability to qualify for a loan based on your revenue and profits will likely vary across lenders. Overall, banks will want to see that your business is profitable in order to approve you for financing. Alternative lenders, on the other hand, will not often require profitability, but will usually have annual revenue minimums. Ultimately, regardless of the specific lender’s requirement, the stronger your business financials (as shown through your annual revenue and profits) the more likely you will be to qualify for financing at lower rates.   

Another way a lender will evaluate your business’s financials in your loan application will be using your bank statements. Lenders will use your bank statements to determine if you can afford your loan and will be able to pay it back. Bank statements can also give lenders some insight into how well you manage the cash coming into your business.

Therefore, at a minimum, lenders will usually ask for four months of business bank statements to support the claims you’re making about your company’s financial history. 

4. Personal and Business Tax Returns

Personal and business tax returns will be among the small business loan requirements that you can expect to see across most lenders.

Just like your personal and business credit scores, lenders will use your tax returns to evaluate the health of your personal and business finances, and therefore, your ability to afford and pay back a business loan.

Generally, you’ll need to provide at least the past two years of your personal tax returns. These documents will be especially important if you have a pass-through entity (a sole proprietorship, partnership, or S corp), where you report your business’s profits and losses on your personal tax return. This being said, your business tax returns will be particularly influential if you have a corporation or an LLC that’s taxed as a corporation. In these cases, the lender will use your last two years of business tax returns to verify your revenue, profit, and expenses.

5. Loan purpose  

It may seem obvious, but a typical small business loan requirement will be a statement describing what you plan to use the loan funds for.

In this statement, you’ll want to be as specific as possible—generally, lenders allow a variety of loan uses, they want to make sure, however, that the amount of money you’re requesting matches up with the purpose for the loan.

This being said, figuring out the intended use of your loan will actually be helpful for you—it will give you an opportunity to plan out your debt, and most important, decide which type of loan is best for your small business. For example, if you need extra funds because your customers aren’t paying their invoices on time, you’ll probably want to consider invoice financing. On the other hand, if you need a cushion for cash flow during your business’s slow months—a business line of credit might be the right option for you.

6. Desired Loan Amount

Directly related to the loan purpose, you’ll need to also specify your loan amount—in other words, how much money you want to borrow from the lender.

On the whole, every lender will have limits with their loan amounts, so you’ll want to keep this in mind when applying for financing. Generally, banks have access to the most capital and can issue loans that are six and seven figures. Therefore, if you need a smaller amount of money (less than $250,000), banks will usually not be the best route. For smaller amounts of funding, you’ll likely want to turn to alternative lenders, and in some cases, SBA loans.

With this business loan requirement, it’s important to be straightforward and clear about how much financing you require (as well as how you’ll use it)—and of course, you don’t want to ask for more than you can afford.