How to Qualify for Small Business Loans

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If you plan to add to the existing small businesses in the United States, which, according to the US Small Business Administration (SBA), has grown to 30 million, you need your capital ready. The Wells Fargo Small Business Index suggests that an average of $10,000 is what you need to start a business. On the other hand, if you are already a small business owner, you need funds for research and development, expansion, or hiring new people. Either way, a small business loan can be appealing to you. If you’re wondering how to qualify for a small business loan, we’ve got the answers.

Who offers small business loans?

Both traditional and alternative lenders offer small business loans. In most cases, you must first consider working with SBA-backed lenders. They often offer generous repayment terms and reasonable interest rates. Small banks are likely more helpful to small businesses than big banks that prefer to work with larger customers. Going with a big bank could be a good choice if you want to loan upwards of $1 million. Alternative lenders, such as those you can find after a quick search on the Internet, may offer higher interest rates but may have more relaxed standards.

It can be overwhelming to sort through all these options and information regarding small business loans, so let’s take one step at a time. In this article, we’ll talk about how to qualify for a small business loan so you can set your new venture or business expansion plans in motion.

How To Qualify For A Business Loan

Here’s a rundown of the small business loan requirements.

Credit Score

A small business lender will check your personal and business credit scores to see how you manage debt. Personal credit scores range from 300 to 850 based on personal debts such as credit cards, mortgages, and car loans. More established businesses may check their credit score at three business bureaus: Experian, Equifax, and Dun & Bradstreet. Business credit scores range from 0 to 100. To qualify for an SBA or a traditional loan from a bank, expect to show excellent personal and business credit scores. Online lenders can be a bit more lenient in credit score requirements and may give more emphasis on the business cash flow and track record.

Legal and Financial Documents

Getting a loan can be time-consuming because of the wide range of documents that lenders require. If you need money fast, consider working with online lenders. They have a more streamlined process with fewer documentation requirements. However, banks and other traditional lenders usually require legal and financial documents. So better be ready with these documents before starting your small business lender search to save time.  

  • – Commercial leases
  • – Business licenses and permits
  • – Personal and business bank statements and income tax returns
  • – Balance sheet and income statement
  • – Payroll records
  • – Business insurance policies and plans
  • – Ownerships and details on affiliations
  • – Legal contracts and agreements
  • – A photocopy of your driver’s license
  • – Articles of incorporation
  • – A resume that shows relevant management or business experience
  • – If you have a limited operating history, financial projections could be required

Business Plan

Lenders require a strong business plan that includes the purpose of the loan and the intent on how it will increase your profits. In addition, they want to see how you will use the money and whether you can repay the debt. Therefore, your business plan must ascertain confidence in your lender, including current and projected financials showing that you will have enough for the ongoing operations and loan repayment. 

Annual Revenue

Most lenders require you to be in business for at least two years to qualify for a small business loan. In addition, they will also look closely at how your business has grown. You can show your sales and cash flow trends via accurate monthly financial statements over the last couple of years. They will look at specific metrics like your debt-service coverage ratio or the net annual income of your business against your yearly debt. Your annual operating income is your business’ earnings before interest, taxes, deductions, and amortization — also known as EBITDA. To determine your debt-service coverage ratio (DSCR), divide your EBITDA by your total annual debt. Lenders differ in their requirements in DSCR. To qualify for SBA loans in the US, your business must have at least 1.15 DSCR. 

Lenders will also look at bank transactions and check them against cash flows reflected in your financial statements. But, again, note that they are more interested in the growth in cash flow than the revenue.


You will likely have to provide collateral to qualify for a small business loan. An asset such as equipment, inventory, or real estate can be used as collateral. SBA loans require collateral on all loans plus a personal guarantee from an owner of the business with at least 20% ownership. Note that a personal guarantee puts credit score and personal assets on the hook. Some online lenders do not require collateral but would ask for a personal guarantee. In addition, some may take a blanket lien on your business assets, which means they are given the right to take business assets such as equipment, inventory, and real estate if the debt is not repaid. If this is not a good idea, consider getting an unsecured business loan.


Lenders consider the industry where your business falls when deciding whether you qualify for a small business loan. Some lenders lean away from sectors they deem too risky, such as gambling, marijuana, and adult entertainment. 

They are also wary of industries that they deem to have unsteady annual cash flows, like seasonal industries. For example, golf courses, ice cream trucks, and landscaping companies may find it challenging to get business loans due to the ups and downs of sales throughout the year. 

Other Loan Types 

Aside from small business loans, there are other loan types to look into.

  • – Equipment loans. These loans help you purchase physical assets — whether heavy machinery or appliances needed for daily operations.
  • – Working capital loans. These loans help you pay day-to-day business expenses, such as employee salaries. They may come in handy in case of sudden drops in profit.
  • – A business line of credit. It lets you borrow a certain amount of money, and you only pay for the interest you spend.
  • – Peer-to-peer lending. It lets you take out loans from a group of investors. It’s a relatively new platform and is usually done online.

How can new small business owners get a loan?

With a robust and detailed business plan, good personal credit score, and collateral, beginners can qualify for small business loans. Over time, as your business grows and becomes more established, you can apply for business loans more quickly and be granted better terms.

Bottom line

Every lender varies in requirements and offerings, so it is essential to take the time to look into every option and compare them. However, the requirements listed above are what lenders generally require and review. Now that you know how to qualify for a small business loan, your search gets a jumpstart.

Taking out a loan is a decision that takes careful consideration. Payment1’s expert lending team can help you go over your options and help you come up with payment plans that let you repay your debt comfortably. Contact us now to get started.

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