5 Things You Need to Qualify for a Small Business Loan
Getting a small business loan isn’t just about needing money — it’s about proving you can pay it back.
A lender’s job is a balance between bringing in business and managing risk. Thus, the more clearly you can demonstrate that lending to you is a prudent transaction, the better your odds of walking away with the financing you need.
Fortunately, most of what lenders want to see is information you either already have or can pull together without much hassle.
5 Things You’ll Need to Qualify for a Small Business Loan
1. Your Personal and Business Credit Scores Both Matter
Lenders likely will pull both your personal and business credit scores.
Your personal credit score gives lenders a window into how you’ve historically managed debt. Your small business’s credit score, if your company has one, shows the same for your company’s obligations.
For personal credit, most traditional lenders want to see a score of at least 680, though some SBA loans and alternative lenders will work with scores in the 600s. Business credit scores use a different scale (typically 0-100), and a score above 75 is generally considered strong.
If either score needs work, you should address it before you apply. Pay down existing balances, correct errors on your credit report and avoid new credit inquiries in the months leading up to your application.
2. Time in Business
Lenders get nervous about new businesses, for good reason. A little more than 20% of businesses fail in their first year after opening, according to 2024 data from the U.S. Bureau of Labor Statistics. And nearly half shutter within their first five.
Most lenders, then, want to see at least two years of operating history before extending a traditional loan (with shorter time frames for financing like business lines of credit or equipment financing). Some alternative lenders will consider businesses as young as six months, but typically at higher interest rates and with stricter terms.
If your business is newer, a Small Business Association (SBA) microloan or a loan through a Community Development Financial Institution (CDFI) may be more accessible options to explore.
3. Annual Revenue and Cash Flow
Lenders want to know that your business generates enough income to cover its existing obligations and the new loan payment on top of them. They’ll look at two things in particular:
- Revenue: Your annual revenue establishes the overall size and health of your business. Minimum thresholds vary widely by lender and loan type, but many traditional lenders want to see at least $100,000 in annual revenue.
- Cash flow: The metric lenders are likely to use here is your debt service coverage ratio (DSCR). DSCR is simply calculated as net operating income / total debt service. A ratio of 1.25 or higher generally means you’re generating $1.25 for every $1.00 of debt you owe, which SBA lenders typically consider a comfortable cushion. Other lenders might set a slightly higher baseline, say 1.35 or 1.40.
4. Collateral
Many small business loans are secured, meaning the lender wants an asset they can claim if you default. Common forms of collateral include commercial real estate, equipment, inventory and accounts receivable.
Not every loan requires collateral — some lenders offer unsecured options. But having assets to put forward can improve your terms and increase your approval odds, particularly if other parts of your application are thin.
5. A Solid Business Plan
For larger loans or newer businesses, lenders often want to see a business plan. This doesn’t need to be a bound, 50-page document. But it should clearly address what your business does, how it makes money and who your customers are. Most critically, it should outline what you intend to do with the loan proceeds and how that use of funds will support repayment.
If you’re asking for $250,000 to purchase new equipment, show the lender how that equipment will increase revenue or reduce costs. The more concretely you can connect the loan to your business’s financial future, the more confidence you instill.
Documents You’ll Want to Have Ready
Once you’ve assessed where you stand on the factors above, you’ll need to gather your paperwork. Requirements vary by lender, but most will ask for some combination of the following:
- Personal and business tax returns (typically the last two to three years)
- Business bank statements (usually the last three to six months)
- Profit and loss statements and a current balance sheet
- Business licenses and legal formation documents
- Accounts receivable and accounts payable aging reports
- A list of collateral, if applicable
Having these organized and ready to go before you apply signals to lenders that you’re serious and well-prepared, which can also work in your favor.
A Few Final Tips Before You Apply
- Shop around. Terms, rates and requirements vary considerably between traditional banks, credit unions, SBA-approved lenders and online lenders. The first offer you receive isn’t necessarily the best one.
- Know what type of loan you need. A business line of credit, an equipment loan, an SBA 7(a) loan and a term loan all serve different purposes and come with different qualification standards. Applying for the right product for your situation improves your odds of approval.
- Borrow what you need — not the maximum you qualify for. Taking on more debt than your cash flow comfortably supports is one of the most common ways small business owners get into financial trouble after a loan closes.
McManamon & Co. Can Help You Put Your Best Foot Forward
Lenders make decisions based on numbers. The cleaner and more compelling your financial picture, the stronger your application will be. That’s where having an experienced accounting partner can make a real difference.
McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that serves small and midsize businesses. Our consulting team can help you get your financial statements in order, assess your current position and identify any gaps that might give lenders pause. That way, you can walk into the application process prepared and confident.
Call us at 440.892.8900 or contact us online today to learn how we can help you put your best financial foot forward.
Tags: financing, McManamon, McManamon & Co., small business banking, small business finances, small business financing | Posted in Financing