Business Loan Eligibility Criteria and Documents Required
Business loans are a quick way of getting finance for your business. Many successful businesses and entrepreneurs borrow to either start their business or grow it.
Small business owners have skyrocketed their businesses quickly, and large companies have expanded their reach by using loans.
Businesses take loans for different reasons. They vary from taking out a loan for small business administration to diversifying into a new niche or keeping up with the competition. Whatever your reason, you have to convince lenders that you are creditworthy.
Not everyone that applies for a business loan gets it. Many loan applications get rejected because the applicants know little about loans and how to access them.
This article shows you the business loan requirements that lenders require and how to tell if you are eligible for it.
Let’s get started.
Business Loan Eligibility Criteria
Anyone considering applying for online or traditional bank loans should check if they are eligible for the type of loan they want to use.
Whether you are taking a secured or unsecured loan, specific eligibility criteria are to be considered, although, in the case of a secured loan, the measures required are lesser.
Criteria for a personal loan differ from that required for a business loan. Small business loan requirements may differ from those for a big business while making a business loan application.
Lenders want to be assured you are creditworthy and can repay the loan. They need to know that you are a small business owner and that the purpose of the loan is for business.
Financial institutions run a credit check on the individual or business applying for a business loan. However, if your business credit history and score are unfavorable, there are small business loans you can get with no credit check.
Small business owners may find it hard to qualify for the best small business lending options with traditional banks. Alternative lending options for small businesses include online and platform loan options.
Who is Eligible for a Business Loan?
- A Private Limited or Limited Company: The major difference between both parties is in ownership. A private limited company is owned privately by individuals, while the public owns a public limited company. Anyone with a private limited or limited company can apply for a business loan.
- A Self-Employed Professional: This group includes entrepreneurs who have built a business of their own, whether big or small businesses. Self-employed professionals are considered for small business loans.
- A Proprietorship Firm: A sole proprietor is another name for a proprietorship firm owned by a single owner. This one-person ownership business is eligible for a business loan.
- Limited Liability Partnership: In this partnership, partners are only liable for the money invested in the business. They are not labeled for the misconduct of other partners. Companies in these categories are eligible to apply for loans.
- Age: Minimum age for a business loan application varies from 18 to 21 to 23. The maximum age is 71.
- Business Duration: How long have you been in business? The lender determines how many years you need to have been in business to qualify for a small business loan, usually for at least six months to 2 years.
- Business Resident: Your business must have a resident. Some lenders consider and even check your business space to determine your eligibility.
- The Minimum Amount of Turnover: Small business lenders tend to determine the minimum amount of turnover. Turnover in accounting means how quickly your business receives cash.
- Business Income: Lenders primarily check your business’ annual revenue before they accept its loan applications. Most lenders have a minimum annual business revenue requirement for loans.
Banks are Checking these Common Business Loan Requirements
Suppose you meet the business loan eligibility criteria, congratulations. You need to know what business loan requirements traditional lenders like banks are checking. Banks' typical business loan requirement applies to both small and large companies.
1. Business and Personal Credit Scores
Just as your business credit score is needed to get a business credit card, the first item banks check for a business loan is your business credit score and personal credit score.
Every lender decides your chance of getting a loan through your personal credit history and business credit score. They evaluate your credibility and the risk involved in lending you money.
The implication is that you must present yourself as creditworthy while preparing to apply for a loan. Your business credit score determines whether your loan application will be approved or not.
The best business credit cards are American Express Blue Business Cash Card, CitiBusiness / AAdvantage Platinum Select Mastercard, and Chase Ink Business Cash Credit Card.
The lender determines a good or bad credit score through the credit scoring model they adopt. You must therefore be aware of the credit scoring models.
Some of the credit scoring models as created by business credit bureaus:
- FICO: The business credit score range for FICO is between 300 to 850. Any score below 580 is considered bad, while any score from 670 above is considered good.
- Dun & Bradstreet: Credit score ranges from 0 to 100. 80 to 100 is considered a good credit score, while 0 to 49 is terrible.
- Experian's National Equivalency Score: Credit score ranges from 360 to 850. Below 360 is a bad score, but any score between 360 to 850 is good.
- CE Credit Score: Credit score ranges from 330 to 830. Below 330 is considered not good, while from 330 to 830 is considered good.
2. Time in Business
Business vintage is a primary requirement. However, it varies based on the financial institution. A business vintage refers to how long your business has been functioning.
Traditional banks require businesses to have been in business for at least two years, while online lenders require at least six months of operation.
The longer a business has existed, the higher its chance of getting a business loan. Lenders tended to believe in business experience over the years. They check their track record to determine their credibility.
3. Business Plan
Most lenders ask for your business plan when applying for a business loan, especially if you are a small business or startup.
If a business has no track record, how do they know the loan is definitely for a company if not by checking the business plan?
A catchy business plan increases your chances of loan approval. You need to know how to write a business plan for a loan.
Your business plan must be precise enough for the lender to understand your business aims and objectives. You do not want our application to be cumbersome.
Write an excellent executive summary, and describe your company in a few words. Blow your lender's mind with your well-structured financial analyses and market plan. Your business plan should detail how you want to spend the loan funds.
You must understand that anyone will love to invest in a well-planned business. Why? Because it is promising and shows that you know how to use the loan.
4. Debt-Service Coverage Ratio
Most creditors use debt-service coverage ratio (DSCR) to determine your capacity to repay the loan to be granted. DSCR is a metric that measures your ability to repay loans compared to your business's net operating income (NOI).
When calculating your DSCR, you discover if your earnings before interest, taxes, deduction, amortization, NOI, and EBITDA can cater to your annual debt.
To calculate your DSCR, you will divide your business NOI by four business annual debt payments. However, note that while applying for a short-term loan, you can calculate your DSCR monthly.
Your NOI should be higher by 1.1 or 1.2 compared to your annual business debt.
5. Debt-to-Income Ratio
For anyone considering getting a loan, you must know your debt-to-income ratio. Knowing it is essential to your proposed creditor. Creditors check the percentage of your income that goes to paying off debt.
If you know your debt-to-income ratio, you need to calculate all your total debt, including personal loans, cooperative loans, child support, business credit cards, and any financial obligation, minus it from your gross income.
The result of the percentage left will determine your loan credibility by your lender. Banks check this to have a history of your business cash flow. Although the minimum debt-to-income ratio varies, maintaining your balance at 43 to 45 is advisable.
6. Collateral for Secured Loans
Since you are considering getting a loan, you must know that you can get a secured or unsecured loan. An unsecured loan is granted based on your financial records, but a secured loan is obtained based on collateral.
If you are getting a secured loan, you will have to give something valuable as collateral if you default on your loan repayment. Your lender has the right to take over such property.
Typically secured loans are car loans and mortgage loans. These loans usually involve collateral such as personal and commercial real estate property or other financial resources.
Secured credit cards involve making a down payment as collateral for the loan. A secured credit card guarantees repayment of the credit card bill at regular monthly intervals.
After you repay the loan, you get your deposit back. Failure to repay existing debt means you forfeit your personal assets.
Businesses that need a large amount of money opt for a secured loan. They can sometimes opt for a personal guarantee. When you add collateral, it is easier to get a loan because it lowers the lender's risk.
7. Type of Industry
Every industry has its risk factors. The higher the risk in your industry, the lesser your chances of getting a loan.
Lenders consider the risk involved in your business before they give out loans. Likewise, banks are restricted from granting loans to specific industries. Before you apply for a loan, you must know if your type of business qualifies to get a loan from your lender.
Banks rarely give loans to the entertainment industry, and when they do, they require collateral. They are restricted from doing business with gambling companies and adult entertainment businesses.
Below are the top sectors that banks consider for loans.
Top Industries that Bank Offers Loans
- Agriculture and Food Production
- Health Care
- Real Estate
8. Customer Profiles That Banks Consider for Business Loans
Different types of people apply for business loans. Banks address loan applications based on the customer's profile.
The loan applicant profile matters to the lender, even when considering business loan proposals.
Due to the different categories, creditors judge applicants differently. It is essential that when you are planning to apply for a loan, you must put into consideration the category you will be applying under.
Loan Applicant Categories
- Self-Employed Individuals: Those under the self-employment category include small business owners, manufacturers, traders, and entrepreneurs.
- Companies and Entities: This group refers to those applying for a loan as a legal body. They include limited liability partnerships, private limited and partnerships firms, and closely-held limited companies.
In determining the loan terms and conditions, banks consider these categorizations. It is revealed in the disparity in their interest rate, document to be required, eligibility criteria, and loan tenure.
Self-employed individuals are considered for SBA loans (small business loans). They may get a lower interest rate on loans. However, companies have a lower interest rate on loans.
Documents Commonly Required for Business Loans
Applying for a business loan from a bank, either as a small business loan or a loan for a large company, requires you to tender some documents requested by the bank.
Many loan applicants are unaware of these bank loan requirements before applying for a business loan. In the long run, their ignorance affects their chances of getting approved.
As you apply for a business loan, we love to make your preparation easier. For this reason, we have made a list of standard documents, including legal contracts and agreements you will need to apply for a business loan.
Official Documents Needed for a Business Loan
- Business bank statements
- Profit and loss statements
- Proof of identity (driver's license, passport, or national identity card)
- Personal and business tax returns
- Credit card processing statements
- Employee Identification Number (EIN) or LLC number
- Legal contract and agreement
- Business license
- Income tax returns
- Proof of ownership (in some cases)
- Proof of business vintage
- Commerce leases
- Required information on outstanding loans
Prepared Document Needed
- Business plan
- Resume and personal background (for start-ups)
- Financial statements
- Customer's list
- Balance sheet
- Accounts payable and accounts receivable
- Business insurance plans
- Payroll records
- Incorporation documents
You will have to submit a carefully filled out loan application form from the bank or online lender.
The lender primarily determines it. However, many lenders, including alternative lenders, use 10% – 30% of your annual business income to determine how much you can lend from them.
The first requirement for qualifying for a business loan from an SBA lender or another type of lender is to have a functional business. Likewise, you must meet your lender's requirements. Meeting your lender’s requirements is what qualifies you for a business loan.
You incur various fees upon applying for a loan, including processing, foreclosure charges or pre-payment charges, legal fees, commitment fees, late payment charges, conversion fees, loan cancellation charges, and others.
Business loan interest rate is influenced by different factors such as business loan type, the lender's policy, and your eligibility as a borrower. However, the traditional bank loan interest rate is 3% – 7%, while online loans range from 11% – 44%.
You can calculate your loan interest by multiplying the monthly or weekly interest on your loan by the number of months or weeks of your loan duration. A business loan calculator is an easier alternative for calculating interest on your business loan.
The age limit for business loan applications vary based on the lender, but the minimum age is 18, while the maximum is 71.