How to Qualify for a Small Business Loan

Starting a small business can be incredibly fun, but, depending on the industry you’re getting into, it can also be incredibly expensive. And if you don’t have enough capital in your bank account to get your company off the ground, your dreams of owning a business might be dashed before you know it.

Fortunately, several financial institutions offer entrepreneurs small business loans to help them strike out on their own. But what are the qualifications for a business loan, and what’s the best way to get approved for one?

Applying for a small business loan can be tricky if you go in blind, but if you know what you’re getting into, it can be piece of cake. Read on to learn everything you need to know about common small business loan requirements and how to apply for the funds you need to succeed.

1. Build Your Credit Score

If you don’t know the first thing about how to get approved for a small business loan, it all begins with having a good credit score. Credit scores range from 300 to 850, and having a score around 680 or above demonstrates that you’re a relatively responsible borrower.

Here’s are the factors that determine your credit score and how much weight each component carries.

  • Payment History (35%) — Whether you pay your bills on time is the biggest factor of your credit score. A single late payment stays on your report for 7 years.
  • Credit Utilization (30%) — Carrying a debt greater than 30% of an account’s limit can drag your score down considerably, as can having an overall utilization above 30%.
  • Age of Credit History (15%) — The average age of your open loans and credit card accounts plays a significant role; 9 years or more is considered ideal.
  • Credit Mix (10%) — Having a combination of credit cards, mortgages, and lines of credit can boost your score compared to having just one type of account.
  • Credit Inquiries (10%) — Applying for several new loans or credit cards within a short period can lower your score by a few points for up to 2 years.

2. Know the Lender’s Qualifications and Requirements

Different lenders have different criteria when it comes to small business loans, and most online lenders publish their requirements online. Be sure to familiarize yourself with a lender’s small business loan requirements before beginning the application process. Otherwise, if you apply to lenders willy-nilly, your credit score will likely suffer based on the number of inquiries.

Additional Requirements for SBA Loans

Businesses that have already been in operation for at least two years are eligible to apply for loans from the U.S. Small Business Association (SBA). The organization’s standard SBA 7(a) loans generally have lower interest rates than loans from online lenders, but they aren’t as easy to qualify for. This is because they require more paperwork, which can take more time to compile. Here’s a closer look at additional SBA loan requirements.

  • Time in Business A business must have an operating history of at least two years and promising business revenue.
  • Loan Purpose Applicants must state precisely what they plan on using the loan for and how the loan will improve the business.
  • Desired Loan Amount Ask for the precise amount you’re seeking for your business and be prepared to detail how you’ll spend it.
  • Proof of Insurance This might include life insurance, workers’ compensation insurance, flood insurance, etc.
  • No Past Defaults Missed mortgage payments or late student loans could prevent you from getting approved.
  • Business Plan A comprehensive overview of your business and where it’s headed. (More on this below.)

What Types of Businesses Do Not Qualify for SBA Loans

Business outside of the U.S. aren’t eligible for SBA loans, and several specific industries are also excluded. Here’s a partial list of the industries and business types that are ineligible for SBA loans. For the complete list, visit the SBA’s website.

    • Casinos and gambling
    • Life insurance
    • Bail bonds and pawnbrokers
    • Banking and real estate
    • Religious instruction
  • Political and lobbying
  • Mining and oil wildcatting
  • Mortgage services

3. Gather Financial and Legal Documents

Depending on what lender you choose to work with, you might be asked to provide for a wide range of documents to complete the application process. Here are some of the documents you should be ready to turn over for review.

Required documents

  • Personal and business tax returns
  • Business license
  • Articles of incorporation
  • Annual business revenue and profit
  • Bank statements
  • Commercial leases
  • Balance sheet
  • Financial projections
  • Personal and business tax returns
  • Disclosure of other debt

4. Develop a strong business plan

One of the best ways to secure a loan is through a comprehensive business plan. Having one of these lets lenders know you’re serious about building your business. If you’ve never developed a business plan before, here’s a quick list of what to include.

  • A description of your company
  • A description of your product or service
  • An overview of your management team
  • An analysis of your industry
  • A plan for your facilities and operations
  • A summary of your current and projected financials
  • A marketing and sales strategy
  • An analysis of your strengths, weaknesses, opportunities, and threats (SWOT analysis)

5. Provide Collateral

Although the majority of online lenders require no collateral when it comes to small business loans, depending on how large of a loan you are seeking, some institutions might ask borrowers to secure their loan with an asset, such as real estate, inventory, or equipment. That way, if the borrower ever defaults on the loan, the lender can attempt to recoup their investment by seizing and selling your collateral.

SBA 7(a) Loan ― Uses of Proceeds

If you secure an SBA 7(a) loan, you can use the funds for a several different purposes including:

  • Operation expenses
  • Marketing
  • Inventory
  • Recruiting
  • Commercial real estate
  • Refinancing high-interest debt

Additional Tips

Credit scores can change as frequently as every week, and if you don’t know where you score currently stands, you can find out by downloading a free copy of your complete credit report at If it turns out your score isn’t anything to brag about, here are three tips to help you boost it before applying for a small business loan.

  • If you’re in the process of paying down multiple credit cards, consider transferring your debt between accounts to balance your utilization ratios. Aim for 30% or less utilization per account.
  • Don’t close unused credit card accounts unless. The longer you keep accounts open, the faster your credit history will age.
  • Review your entire credit report and look for errors. If you spot something inaccurate or fraudulent, contact the credit bureaus to resolve the issue before you apply for a loan.


Now that you know the basics about how to qualify for a business loan, you can compile your requirements and knowledgeably assess your options.

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