SMB Loan Requirements: How Do You Qualify for a Small Business Loan?

Business Guides

Jacques Famy Jr
Review By Todd Millman

Getting approved for a loan can be tough: according to the Small Business Credit Survey (SBCS), over half of small businesses say their funding requirements aren’t met. What’s more, only 20% of those who applied for financing received everything they needed. 

Small and mid-sized businesses (SMBs) rejected for funding have to forego important business decisions that could contribute to growth. They also have to make peace with the fact that they spent time and energy applying, only to be denied.

But even if you don’t get the loan you want the first time, that doesn’t mean your business will never receive the financing it needs. The fact is that funding is vital for driving growth and being successful. You’ll need it at some point, even if you can get by without a business loan right now.

And you can qualify for financing — you just have to understand what the small business loan requirements are and know how to improve your chances of getting approved. 

That's exactly what we cover in this article. Read on to learn about the main requirements for small business loans and what you can do to make getting financing easier.

How Do You Qualify for a Small Business Loan?

To qualify for an SMB loan, you need to know what the business lender or funder expects and requires and then do the best you can to meet those requirements. 

  • You can get a small business loan from traditional banks, online lenders, credit unions, the Small Business Administration (SBA), and more. Each of these institutions provides unique opportunities for Small to midsize businesses.
  • Banks and traditional lenders provide larger sums but may have higher interest rates and require collateral. You’ll have a better chance of qualifying if you’ve been in business for a year or more and have good credit.
  • Other lenders are more flexible when it comes to requirements but, in compensation, may offer lower amounts.

Small Business Administration loans are the best option as they offer lower interest rates for a large loan amount. However, to apply, you’ll have to submit a long list of documents and wait for weeks to a month or more to find out if you qualified.

Which lender you choose depends on your goals and situation, but there are a few eligibility criteria that any business must meet to apply for a small business loan, including:

  • Time in Business
  • Meet minimum revenue requirements
  • Meet credit standards
  • How you manage business cash flow through business bank accounts
  • Industry - What you do for business operations

You’ll have to pay for the costs of financing — including interest charges and any loan administrative fees. So businesses can also explore alternative resources, such as personal assets or friend and family loans, before adding on loans.

Why Apply for SMB Loans?

As a small business, you should always try to stay one step ahead financially. This understanding underlines the significance of self-funding, and also highlights the diverse lending options from various financing companies you could explore to bolster your business growth. The savings you've nurtured can act as a shield, however, there might be times when external financing is required. In these situations, smart practices such as borrowing can prove useful. As a crucial step in your financing process, understanding the requirements of small business lenders can be extremely beneficial. It can help polish your loan application, saving you from unnecessary delays or declines.

In the process of applying for small business loans, you can leverage the borrowed amount to take financially advantageous steps. Here are just some of the ways you can put a business loan to work:

  • Manage your cash flow effectively
  • Pay off debt in manageable installments or consolidate debt
  • Invest in expanding your startup company's assets and human resources.
  • Small business loans can also provide crucial startup funding to maintain smooth day-to-day operations, forming an essential backbone of any thriving business.

Remember to seek out small business lender reviews before making a decision. This will ensure you pick the best financing company conducive to your business requirements and expectations.

What Are the Requirements for Small Business Loans?

Whatever reason you have for applying for a small business loan — to refinance business debt, use as a down payment for expansion, or something else — there are several requirements you must meet on top of the basic eligibility criteria for business borrowers. These requirements apply no matter the type of institution you're applying with, but some lenders might be more stringent than others.

For example, SBA loans and bank loan programs require detailed financial documents. Some banks will also expect at least a year of business activity. With online lenders, you could get quick business loan approval even if you’re a new company that doesn’t have a long track record.

Let's take a look at the main small business loan requirements.

Requirement #1: Good Credit

One of the first things any lender will check is your credit score. Banks, alternative lenders and SBA lenders will probe into your business credit history while traditional credit bureaus evaluate your personal credit score. This creditworthiness examination, an essential among eligibility requirements lenders look at, assists them in determining how responsibly you’ve managed both personal and business finances.

Banks and lenders also scrutinize the personal credit of the small business owner or an officer, particularly if they necessitate a personal guarantee for the loan. This guarantee is standard with business loans, especially for those that don't necessitate collateral.

A high FICO score is not just a qualification requirement, but it can also shave off some digits from your interest rate. That’s because a good credit score sends a positive signal to lenders about your stick-to-itiveness in meeting financial obligations on time.

The benchmark for a good credit score for most lenders is 700 or above — but what happens when your score falls short? Even in such cases, there's plenty of options. Your eligibility isn't exclusively tied to credit scores.

You can enhance both your business and personal credit by religiously adhering to on-time payments for any existing accounts, such as credit cards or auto loans. Maintaining a low balance on any lines of credit also helps. This unwavering adherence could fetch you some rate discounts.

small business loans requirements

The climb may be steeper for small business owners with FICO scores less than 580 in securing an SBA loan or a traditional bank loan. But, don't underestimate the power of alternative financing solutions. Online lenders, often having less stringent requirements, could still be a valid option if your credit is an issue, especially if you have a strong and consistent revenue stream or collateral. So despite the hurdles, don't exclude the possibility of discount options with certain lenders.

And while small business owners with low credit scores will have limited options when it comes to an SBA loan or a traditional bank loan, you can still qualify with many online lenders if you have bad credit.

Requirement #2: Positive Cash Flow 

Another crucial requirement is financial health. As part of your application, you will often liaise with microloan lenders like Accion Opportunity Fund and OnDeck to submit your business bank statements and financial statements. These documents not only demonstrate a positive cash flow but also an income high enough to manage elements such as invoice financing, payroll, and the debt associated with a startup.

Your financial statements largely include your cash flow statement, balance sheet, and income statement - also known as the profit and loss statement. It would be ideal to present forward-looking financial projections for these, illustrating to lenders your vision for where your business is headed. Lenders will use these pieces of information to calculate metrics such as the debt service coverage ratio and debt to income ratio. These numbers showcase your business's capacity to bear the burden of a small business loan.

Moreover, effectively demonstrating these aspects could potentially unlock perks like startup grants, ease of access to lines of credit, and more favorable loan terms through mechanisms like invoice financing.

Requirement #3: Enough Time in Business

SMBs can be a few months old or years in the making. Small business lenders take the age of a business into account before deciding whether to provide funding or not. This is why it can be challenging for startup businesses, especially those without established business credit, to qualify for bank loans.

The older your business, the better your chances of receiving approval. Early stage businesses should look for alternative funding means such as bootstrapping, asking friends and family, or setting up a crowdfunding page on platforms like GoFundMe for business. After securing initial funding and establishing a solid business footing, these businesses could then apply for a small business loan.

Requirement #4: Available Collateral

Even after checking the business owner's personal and business credit and establishing the financial health of your business, lenders may still want you to use collateral to secure the loan. Offering collateral, perhaps in the form of valuable machinery or inventory, can significantly bolster your chances of accessing various debt financing options such as a term loan for your business needs from big-name banks like Wells Fargo and credit union financing options. Collateral, from assets like business equipment to personal properties, essentially works as an assurance to the lender that regardless of the outcome, they can recoup potential losses.

Applications for secured loans from reputable lenders have a way to recoup losses associated with default as the collateral can help recoup losses. This leveraging strategy could help in not just securing your eligibility for small business financing but often at a lower interest rate too. Considering details like prepayment penalties is also important while choosing a lender who works to meet your needs. It becomes especially useful if you're scouting for a substantial loan or equipment financing to cover the entire cost of acquiring business machinery.

Don't worry if you're yet to accumulate assets; you can start small-scale. There are a multitude of business funding alternatives that don't mandate collateral. These alternatives give you an opportunity to build good credit, and in time, aim for larger bank financing options by pledging collateral.

Requirement #5: Low Industry Risk

Another factor that is important to lenders is the industry you are in. Every industry reveals its unique characteristics and associated risks such as seasonal downturns and significant cash flow fluctuation—a concept not lost on lenders. A keen understanding of these potential risks often influences the APRs and repayment terms of their healthcare practice loans and other loan products, including merchant cash advances.

Preferred Industries

  • Healthcare Industry
  • Manufacturing
  • Auto Repair
  • Restaurant
  • Wholesalers
  • Retailers

Restricted or Prohibitive Industries

  • Adult entertainment
  • Gambling
  • Firearms
  • Financial Services
  • Landscaping; often deemed as high-risk due to seasonality.

If your small business falls within these prohibitive industries, traditional lenders may be reluctant. However, alternative lending solutions do exist. For instance, options such as a merchant cash advance work profoundly by giving a lender a portion of your future sales—an excellent choice for businesses with high sales volume needing cash swiftly. Notably, online or alternative lenders offer a variety of loan products, including merchant cash advances and healthcare practice loans. Nevertheless, striking a balance considering factors such as APRs, loan types, and repayment terms will be crucial in deciding the most affordable and efficient loan option for you.

Final thoughts on Requirements

However, remember that some lending situations might require a personal guarantee, meaning you could have to secure the loan with your personal assets including savings. This is where a quick insight into your own financial health becomes relevant before engaging in any borrowing scenario. Be considerate whether nonprofit organizations could be a safer lending option, as typically offered through nonprofits, government agencies, and corporations, some tailor their focus on specific types of business owners or particular industries.

Why SMB Applications Can Be Denied — And What You Can Do About It

You might think that because you've handed in all your documents correctly and on time, you’ll get approval for a bank loan or an SBA loan. Indeed, completing your applicant business paperwork meticulously is crucial, but the approval isn't always guaranteed. The truth is, lenders like traditional banking institutions or third-party companies such as Nerdwallet and Fundbox, might still deny your application due to loan repayment conditions or insufficient documentation. Even success as a business owner does not assurance approval. Let's provide an overview as to why your application could be rejected, and furnish actionable tips to circumnavigate these roadblocks. Remember, smaller banks appear to have higher approval rates and satisfaction than bigger participants, according to the Federal Reserve's 2022 Small Business Credit Survey.

Here are a few reasons your application could be rejected and what you can do about them:

  • You have an overall low personal or business credit score. Explore the option of applying with microlenders or alternative lenders like Fundbox on their websites as your final interest rate is highly dependent on the loan type or size, repayment term, your credit score and if you can provide collateral.
  • You do not have enough collateral or assets to secure your loan. Consider applying for a smaller loan amount that requires less collateral or explore "no-doc" business loans that entail lesser documentation.
  • You lack sufficient working capital for loan repayment. It might be wise to delay your application and work on promoting your business via your website to increase revenue, cash flow, and therefore, your business's qualifications.
  • You are overwhelmed with debt. Consolidating your debt into one manageable account and trying to reapply once you’ve decreased the balance could be effective solutions.
  • You have previously defaulted on a loan. You should utilize financial statements and forecasts supported by valid records to demonstrate a positive shift in your circumstances and your company’s ability to fulfill its debts.
  • Lenders don't perceive your financial need for a loan as being significant. Present them a comprehensive business plan that eloquently articulates the necessity of the loan.
Reasons why SMB applications can be denied

While small businesses may encounter myriad challenges when seeking financing—poor credit, inadequate collateral, or insufficient business tenure—the upside lies in preparing your paperwork diligently and finding suitable lenders. Remember, overcoming these hurdles can lead to securing the funding you need and help your business make strides towards a healthier financial future.


A small business loan is incredibly useful for ensuring day-to-day operations and long-term success. It serves as an indispensable financing tool, opening doors for the further development of your enterprise. Harnessing the potential rewards offered by different lenders might propel your business forward more rapidly. From equipment financing to meeting cash flow needs, such a loan can cover a broad range of startup necessities.

When structuring a business, it's crucial to grasp Formal legal procedures like creating Articles of Incorporation and bylaws. These are key in establishing a beneficial relationship with lenders. Applying as a young business can indeed feel daunting, but with resources like Advancepoint Capital, your journey toward funding doesn't have to be overwhelming. Microlenders might be another option; they're not-for-profit organizations designed to aid those who may not traditionally qualify for business loans.

In your quest for business financing, make AdvancePoint Capital your first stop. We offer competitive loans for every type of business, along with potential rewards or rate discounts when banking members secure a loan. Explore our trusted services, used by more than 7,500 businesses, and translate your business funding dreams into reality at Get a quote now.

Jacques Famy Jr

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