What Are the Criteria for a Small Business Loan and How Do I Apply for One?

by Carter Toni

Photo by Andrea Piacquadio from Pexels

Every start-up needs to acquire small business loans for it to prosper in the market. They serve as a foundation for your company to move forward.

Applying for a small business loan is easy as long as you know what lenders are looking for. By understanding the process and requirements, you can avoid issues when it comes to your application. More importantly, the preparation of documents streamlines your application process.

The approval of your business loan depends on a set of criteria given by the lender of your choice. But before you learn what these requirements are, let’s first discuss where you can apply for a small business loan.

Small Business Loan Sources

Small business loans help start-ups in getting started, managing expenditures, and expanding. You can borrow a minimum of $5,000 from small business grants. And some countries/banks even offer up to $300k, which is adequate for a start-up business.

Banks are the main source of small business loans. However, they can be strict about their application.

They need to be confident that your business will be able to pay back the loan. Even if you’re a start-up company, you can be qualified if you have a good business plan and personal assets to give as collateral.

Every bank has different loan alternatives with varying amounts, maturities, and fees.

Another source of funding is government grants. They are one of the most popular sources of funding since they do not have to be repaid. Usually, government grants cater to certain industries or groups of people, such as youth or women.

In USA however, small businesses can get funding from the Small Business Administration (SBA program). The program’s goal is to enhance access to financing that is otherwise unavailable to small firms.

Alternative Business Loan Sources: Non-Bank Lenders

Small businesses can get a lot of loans from banks. However, they are usually the most difficult source for a start-up business to get money.

As an alternative, most small businesses get their financing from non-bank lenders. They provide capital to businesses that do not fulfill the size, time-in-business, or credit requirements for a bank loan. Nonbank lenders will help you expand so that you can eventually qualify for a bank loan.

  • Online Direct Lenders

As an owner of a start-up company, you should always be on the lookout for new and better sources of funding. You can also apply for small business loans through online direct lenders. They are a good choice if you want to have a faster loan application process.

Most small business loans have different alternative funding options that depend on your needs. Some lenders also offer bad credit loans that are helpful for small businesses. Additionally, start-ups are still in the process of building their credit. Online lenders are more laidback when it comes to credit scores and so they become a natural choice.

  • Private Lenders

Private lenders don’t rely on investors. Instead, they provide loans using their own funds. Since they are not bound by the same laws as traditional lenders, they can be more creative with what they offer. Moreover, they are more flexible with the amount of money they lend. You can ask for small loans that are otherwise unacceptable to other lenders.

  • Marketplace Lenders

Unlike private lenders, marketplace lenders are affiliated with investors. They link small businesses to potential investors directly using an online platform. These lenders accept loan offers from investors and disburse the funds to borrowers, and they earn through commissions.

  • Crowdfunding

With the help of an online platform, you can raise enough funds to support your business. There are different types of crowdfunding and knowing which type suits you is a big game-changer.


The downside to crowdfunding is that it does not guarantee funding. Instead, it works like a donation where investors look at your offer and decide if they can lend you money or not. So it depends on how attractive your offer is.

Requirements for Applying for a Small Business Loan

Each lender has a specific set of criteria that you need to meet. There are, however, some loan criteria that lenders usually look for. Below is a breakdown of all the credentials that are commonly required for small business loan applications.

1.   Credit Score

Credit ratings allow lenders to know your capacity to repay the money you borrow. Personal credit scores help them see how you handle debt.


As a general rule, you need to have at least 600 FICO ratings. With such ratings, lenders are more likely to approve your loan. While that is the case, you can still apply for a business loan with bad credit scores.


You can get credit reports and scores outside of the main credit agencies. However, lenders rarely use these for making credit judgments. The FICO ratings from the main credit report agencies are still recommended.

2.   Time in Business

How long you’ve been in business is also an important factor that lenders look into. The longer you have been in business, the better because it leaves an impression that your company has been successful over time.


Generally, you need to be in business for a minimum of two years. It’s not impossible to secure a business loan if your company is less than two years old, but it limits your options. Banks are less willing to lend to businesses that are less than two years old. However, this does not end your loan application since you can still show your worth through other aspects.

3.   Business Plan

Not all lenders will require you to present a business plan, although it will be the case in some cases. Nevertheless, you have to know how to write one for such cases.


A business plan helps in the development of a growth strategy for your company. Your strategy should include financial planning and a marketing and sales strategy. Additionally, it should have an explanation of your company’s daily operating procedure. This will help prove that your company generates revenue and succeeds.

4.   Collateral

Collateral refers to the actual assets that you currently own. This includes your invoices, equipment, enterprises, and real estate. Although it isn’t usually necessary, you may be requested to put up a fixed asset to get a loan. If you fail to repay your loan, lenders can sell your collateral to recoup part of their losses.


Not all lenders need specific collateral. However, banks will want to know what sort of collateral you have and how much it’s worth. Alternative lenders, on the other hand, only need a personal guarantee as a form of security.

5.   Annual Cash Flow

A consistent and healthy flow of cash demonstrates to lenders that you can make the loan installments. It’s simply a reflection of the health of your company. Lenders will most likely look at costs in addition to income to assess how lucrative your firm is.


If your company deals with bills regularly, there’s no doubt you’ve dealt with late payments. Unpaid invoices can impact your business’s turnover and cash flow significantly.


Fortunately, invoice factoring is a viable funding alternative for business owners. Through this method, your company can sell its outstanding bills to a third-party lender. Instead of waiting for your customers to pay their invoices, you’ll have the extra cash flow to assist you.

Steps to Applying for a Small Business Loan

Small business loan requirements vary per lender. That’s why it’s important to discuss with lenders about their process before applying for a loan. This way, you’ll be prepared to gather any documents or information you’ll need to submit.


With that in mind, let’s go through the basic steps you’ll need to follow to obtain a business loan.


  1. Figure out why you need to apply for a small business loan.
  2. Determine how much debt you can afford.
  3. Examine your financing choices.
  4. Prepare your loan documents.
  5. Fill out an application for a loan.

The Takeaway

When looking for a lender to finance your company, you need to make time to research the criteria for loan application. Each lender has a different set of criteria, but the list above includes the ones that are usually required.


Having a good credit score and a fool-proof business strategy can increase your chances of getting a loan approved. You also need to show that your company can repay your line of credit with an annual cash flow report. Lenders also need proof of your assets should you ever fail to repay your loan.


Traditional banks are usually strict about this. If your application did not push through, online lenders are also available.

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