How to qualify for a small business loan

Small businesses use all types of loans to bridge short-term funding needs and grow without dilution or losing control. But successfully securing a small business loan can be an opaque, confusing process for first-time borrowers. 

In this guide, we’ll break down how to choose a lender, common loan requirements, and how to prepare for the application process. 

Lenders vary both in the types of financial products they offer and the types of borrowers they serve. Here are the most common lender types:

• Traditional banks: National, name-brand banks offer term loans and lines of credit, but typically have strict requirements around credit, revenue history, and collateral.
• Credit unions: These member-owned nonprofits often provide small business loans with lower rates and more flexible underwriting than traditional banks, but may lack certain loan options and services due to their smaller size.
• SBA-backed lenders: Banks, credit unions, or other institutions issue loans guaranteed by the U.S. Small Business Administration (SBA), usually with favorable terms, but longer application processes. 
• Micro-loan lenders: These organizations make small, flexible loans, often to newer businesses, but cap their loan amounts at relatively small sizes (typically under $50k). 
• Venture debt providers: These specialized lenders, often working with or in parallel with VCs, provide debt to high-growth, venture-backed startups.

The type of lender you choose will depend on your qualifications as a borrower, along with your capital needs and the loan terms you’re seeking. 

Most first-time borrowers aren’t sure what exactly qualifies their application to be approved for a loan. Contrary to popular belief, both business and personal factors can play a role in a lender’s decision. 

1. How long you’ve been in business

Traditional lenders often want to see at least two years of operating history. Though some tech-forward lenders or community banks may offer more flexible “time in business” requirements of at least 6 months, the longer that your business has been operating with consistent financials, the more likely you are to be approved. 

2. Your personal and business credit scores

It’s a common misconception that you can incorporate a business and secure financing for it as if it’s completely independent from your personal finances. But this isn’t exactly the case. Although it’s a good idea to start building business credit as soon as you incorporate your business, lenders will factor your personal credit into their underwriting, especially if your business is new, has limited credit history or the loan requires a personal guarantee. 

Founders with a history of established business credit from reporting agencies — like Dun & Bradstreet, Experian Business, or Equifax Business — may only have to show their business credit for their application. These scores are typically measured on a scale of 0–100, with ranges corresponding to your risk as a borrower.

Reporting agency Dun & Bradstreet, for example, follows these ratings:

• Low risk: 80–100 business credit score
• Medium risk: 50–79 business credit score
• High risk:0–49 business credit score

3. Company financials 

Lenders want to see consistent income and positive cash flow. For most term loans, lenders look for a minimum of $100k in annual revenue, and some require over $250k.

Beyond top-line revenue, lenders want to know that you'll generate enough cash flow to cover your debt obligations. This metric is called the debt service coverage ratio (DSCR): 

DSCR = monthly net operating income (NOI) / monthly debt service 

Though lender requirements vary, a DSCR of 1.25x is fairly standard for what lenders will look for when underwriting your application.

4. Debt-to-income ratio and existing liabilities

Your debt-to-income (DTI) ratio is often calculated when you apply for personal loans, including mortgages, credit cards, or auto loans. It may also be factored into business loan applications, if you’re personally guaranteeing the loan. 

Lenders calculate DTI by dividing your personal monthly debt payments by your gross monthly income. Most want to see a ratio below 36%, though some will go higher, if the rest of your financial profile looks favorable.

5. Legal, tax, and financial documentation

Regardless of the loan type you apply for, lenders will, at a minimum, want to see your basic document set, which includes:

• Business and personal tax returns (usually for two years)
• Business’s cap table (if you have multiple shareholders)
• Profit and loss statements
• Balance sheets
• Bank statements (typically for six to 12 months)
• Business plan or use-of-funds statement
• Legal documents (LLC formation, licenses, contracts)

Completing an entire underwriting process for a loan application can take weeks, if not months, and it can be a major distraction to your day-to-day responsibilities. Before you start, do a pulse check to see where you stand. 

Here’s how:

1. Pull your credit scores. Check your personal FICO score for free through AnnualCreditReport.com. To check your business credit, access credit report information through Nav or D&B Credit Insights.
2. Review your financials from the last six months. Export your bank statements and look for large, irregular purchases or withdrawals, which could impact your financial health metrics. Without context, lenders might consider these red flags.  So, it’s wise to communicate upfront about why these occurred. 
3. Calculate your own cash flow metrics. Your DSCR and DTI tell lenders a lot about your ability to manage cash flow and pay them back on time. If your DSCR or DTI is below the industry standards, consider paying off debt or generating more income before applying. 
4. Check for compliance issues. Once you’ve gathered your tax returns, business licenses, and permits, make sure you don’t have any overdue debt obligations.

If you find that any of your financial metrics are lower than expected, that doesn’t mean you can’t qualify for financing. It may just mean you have to look for a different source of financing (like a credit union term loan instead of a more stringent line of credit) or accept less favorable terms. 

If, after checking your loan readiness, you realize that you're not quite ready to apply yet, here are some adjustments you can make to build business credit and strengthen your future application: 

• Separate business and personal finances. Open a dedicated business bank account, so all transactions are tracked and compliant.
• Build business credit early. To start building business credit, register with a business credit bureau and use a business credit card.
• Organize and track expenses. Use accounting software to keep accurate records. This shows lenders that you manage cash flow.
• Consider co-signers or collateral. Using collateral (secured loans) or strong co-signers can reduce lender risk and make approval more likely, especially with weaker credit or revenue.
• Pay down debt strategically. Reducing high-interest balances can improve your credit score and lower your debt-to-income ratio before you apply.

Lenders commonly offer a free "pre-qualification" option to prospective borrowers to get you excited about possible approval (and collect your contact information). But  "pre-qualifying" for a business loan doesn’t mean you’ll ultimately get approved for it. . 

During the pre-qualification process, lenders will perform a soft credit check, which discloses high-level information, like your current accounts and payment history, and ask for basic financial details. However, if you plan to move forward with a full application, they’ll need your full set of application documents (listed above), along with a hard credit check, showing details of credit accounts, missed payments, and financial events, like bankruptcies.

Though you can use pre-qualification to gauge whether your loan might get approved, it’s common for loan terms to change after a lender performs their full underwriting process. 

The market for small business loans spans many loan types, each with different terms, underwriting processes, and borrower requirements.

Term loans are the traditional small business loans offered by banks and credit unions. You’ll typically borrow a lump sum and repay over 1–5 years. Lenders prefer borrowers with a good credit score (680+), at least two years in business, and $100,000+ in annual revenue. Today, the median interest rate for term loans hovers around 7.4%. 

Lines of credit

Lines of credit work like a business credit card.  You're approved for a maximum amount and only pay interest on what you use. Because they're revolving credit, lines of credit are harder to qualify for than term loans.

Microloans

Microloans are small loans (typically under $50k) designed for new businesses. They only require 6 months or less of financials and often accept lower credit scores. Though these can be easier to access, they often come with higher interest rates.

SBA loans 

SBA loans are provided by banks and partially guaranteed by the Small Business Administration (SBA). These loans typically come with the best terms, but come with a longer underwriting process and are more difficult to qualify for. SBA 7(a) loans, for example, require a personal guarantee. 

Venture debt

Venture debt is a unique type of debt financing provided by tech-forward banks or VC firms. Startups can access this financing after a recent equity raise, if they have strong financials. The downside is that venture debt agreements can have strict requirements for the company, like a minimum revenue target and a debt-to-equity ratio.

Qualifying for a small business loan is ultimately about demonstrating your repayment ability through both your business and personal finances.

If you’ve pulled your soft credit check, pre-approved your own financials, and realized you may fall short of what a lender needs, strengthen your application by separating your accounts, establishing business credit, and improving your finances. 

Regardless of which loan option you end up securing, using debt capital to bridge funding needs or invest in future revenue-generating activities can help you keep building on your terms, without new investors on your cap table.