Did you have a sibling or friend who could always convince adults to let them stay up late or see the newest movie? Were they just lucky? Maybe. Or they understood what was important to your mom and presented a strong case.
The same is true for small business loan applications. You don’t need to rely on luck when you understand what business capital lenders are looking for. Knowing what is important lets you prepare your finances and craft a winning application.
Let’s break down the main elements in small business loan applications so you can get the funds to cover operating expenses, invest in equipment, or expand your operations.
Annual Revenue
A lender wants to know whether your income is high enough and consistent enough to support loan repayment. They’ll look at your monthly gross revenue and compare it to the expected monthly repayment amount.
The higher your revenue relative to the loan payment, the lower the risk to the lender. For instance, a loan with a $1,500 monthly payment seems reasonable if your business generates $25,000 a month, but raises red flags if you only earn $5,000 monthly.
Lenders also look at the patterns of your revenue. Consistent income, even if you don’t make the same amount every month, means you won’t miss payments. Similarly, your revenue trends can strengthen your application by showing growth.
Figure out your proposed loan’s estimated monthly repayment amount and compare it to your monthly income before applying. If the payment is fairly high, show how the financing will improve your revenue, identify growth patterns for your business, and specify any additional sources of income to balance the risk. These factors can help convince lenders you are not a risky borrower.
Debt-to-Income Ratio
Your existing debt load is a critical factor in a loan application. Lenders use a debt-to-income (DTI) ratio to compare your total monthly costs to your monthly income. They want to know if you can handle additional monthly payments.
Let’s say your plumbing business earns $20,000 monthly and has $5,000 in monthly obligations between vehicle loans and expenses, payroll, equipment costs, and marketing. If you’re applying for a loan that would add another $2,000 per month, your total obligations would be $7,000—or 35% of your income. Many lenders would accept your application. But it’s risky if your new loan pushes your expenses past 50% of your income.
Pay off smaller loans, decrease regular operating costs, or increase revenue before applying to improve your DTI ratio. Or shop for lenders who offer refinancing options to help restructure your debt more efficiently. You have financing options even if your debt load is high.
Credit Scores
Credit scores give lenders a snapshot of how responsibly you’ve managed credit in the past. Your personal credit score carries the most weight, especially if you’re a sole owner or a newer business without an established business credit profile. Most lenders look for a score in the mid-600s or higher.
Lenders may also examine your credit history for patterns. Making on-time payments and consistently using limited amounts of credit show a pattern of reliability. Using too much credit and defaulting on loans creates a riskier picture.
Don’t panic if your credit isn’t perfect. Show strong revenue, a solid business plan, or collateral to lessen the impact of a low score. Shop for working capital lenders with lower score requirements or place less stock on credit scores. And strengthen your future applications by establishing a good credit history and boosting your credit score.
Time in Business
Lenders value stability, and how long you’ve been in business is one way they measure it. The longer your business has been operating, the more likely you are to have weathered market changes, gained financial discipline, and have the resources to repay the loan.
The length of time depends on the type of loan. Most lenders consider six months the minimum time for a short-term loan. Loans with longer terms, like equipment financing, often require more than two years. For a Small Business Administration (SBA) loan, you’ll need to show more than 12 months in business since the federal government backs them.
If your business is newer, you could still qualify under stricter terms. For other options, consider alternative and nontraditional lenders that offer loans tailored to start-ups or new businesses. When you can, show your business’s staying power to build lender trust.
Cash Flow
Lenders often request several months of business bank statements for a more accurate view of your cash flow. They review deposits, withdrawals, cash reserves, and revenue to see how you manage your business’s finances.
If your account regularly dips into the negative or shows inconsistent deposits, it may raise concerns about your ability to manage new debt. On the other hand, steady income and responsible expense management can help your application stand out.
Even if your cash flow is small, bank statements offer a unique look at your financial management. Keep them clear, organized, and thorough by:
- Using one business account
- Making and following a budget
- Building cash reserves
- Following a schedule for regular payments and deposits
- Recording your transactions separately
Purpose of the Loan
A reputable lender wants to understand why you’re borrowing, even if they’re comfortable with your numbers. Plan a clear, specific use to show you’ve thought strategically about your financial needs.
Maybe you are taking out a short-term loan to expand your business. Be specific about your needs. Saying “I need $40,000 to open a second location and hire two staff members” shows intent, planning, and investment in long-term growth. The more concrete your explanation, the easier it is for a lender to envision your loan’s value and repayment potential.
Your Business Documents
You’ll need to submit a basic set of documents alongside your application. The requirements vary by lender, but this can include:
- Business bank statements (typically last 3–6 months)
- Business license or registration
- Tax returns (personal and/or business)
- Proof of ownership
- Profit and loss statements or balance sheets
Be organized and prompt in delivering these materials to show that you take your business seriously. Provide any business plans you have created for the funding or revenue trends showing growth to demonstrate your thoroughness. It is easier for a lender to quickly approve your application when you are financially prepared.
A Strong Case
Applying for a small business loan is less intimidating when you know what lenders are looking for in the approval process. You can fine-tune your application and account for any weak areas beforehand. The more prepared you are to tell your financial story, the stronger your chances of getting the funding you need.
