What are the basic requirements for a business loan?

Here is the expanded question incorporating more context:
“As I’m exploring financing options for my small business venture, I need to understand the foundational criteria banks and lenders typically look for when evaluating a business loan application. Specifically, what are the absolute minimum requirements – or the basic requirements – that a business and its owner must generally meet just to be considered? I’m thinking in terms of essential elements like a minimum time in business, specific personal credit score thresholds, standard financial documentation (like tax returns, profit & loss statements), whether any collateral is usually mandatory, the significance of having a solid business plan outlining the loan purpose, and what kind of business performance metrics (like annual revenue or cash flow) are often expected as a baseline? I realize exact details vary by lender and loan type, but I’m seeking a clear overview of the fundamental non-negotiables or baseline qualifications that represent the starting point for most traditional business loan applications.”

Basic requirements for a business loan typically include:

1. Legally Registered & Operating Business:

   • Proof of business registration (e.g., Articles of Incorporation, Partnership Agreement, Sole Proprietorship DBA).
   • Valid business licenses and permits required for operation.
   • Proof that the business is actively operating with established revenue streams.

2. Strong Business Credit History:

   • Business credit reports (e.g., Dun & Bradstreet Paydex, Experian Business, Equifax Business) showing responsible management of business debts and obligations.
   • On-time payment history with vendors, suppliers, and existing lenders.
   • History of maintaining positive credit relationships.

3. Robust Personal Credit History (Especially for Small Businesses/Startups):

   • Personal credit reports (FICO, VantageScore) for the business owner(s) with good to excellent scores, typically 680+.
   • Strong payment history on personal debts (mortgages, auto loans, credit cards).
   • Low personal debt-to-income (DTI) ratio.
   • Minimal recent credit inquiries or negative marks (bankruptcies, collections).

4. Financial Statements & Records:

   • Business Tax Returns: Usually at least the last 2-3 years of federal and state business tax returns (e.g., Form 1120 for corporations, Schedule C for sole proprietors/partnerships).
   • Personal Tax Returns: Often required for business owners, especially for Sole Proprietorships and Partnerships (last 2 years).
   • Business Bank Statements: Typically the last 12-24 months to track cash flow, average balance, and transaction patterns.
   • Profit & Loss (P&L) Statements: For the current year and often the previous 1-3 years to show profitability trends.
   • Balance Sheets: For the current year and often the previous 1-3 years to assess assets, liabilities, and owner’s equity.
   • Accounts Receivable/Aging Reports: If applicable.
   • Accounts Payable Aging Reports: If applicable.
   • Accounts Receivable Invoices: If using invoice factoring.

5. Solid Business Plan & Financial Projections:

   • Detailed business plan outlining the company, market, products/services, marketing strategy, management team, and specific purpose for the loan.
   • Realistic financial projections (usually 3-5 years forward) including projected income statements, cash flow statements, and balance sheets. Demonstrates how the loan will be repaid and contribute to growth.

6. Adequate Cash Flow:

   • Proof that the business generates sufficient positive cash flow to comfortably cover all existing expenses, debt obligations, plus the new loan payments. Lenders analyze Debt Service Coverage Ratio (DSCR).

7. Collateral (for Secured Loans):

   • Assets pledged as security for the loan, reducing the lender’s risk. Common collateral includes business equipment, inventory, real estate, accounts receivable, or sometimes significant cash reserves. The Loan-to-Value (LTV) ratio is critical.

8. Personal Guarantee:

   • A legally binding promise by the business owner(s) to repay the loan personally if the business default. Almost always required for small businesses and SBA loans.

9. Business Experience & Management Team:

   • Resumes demonstrating relevant industry experience and management expertise of the business owners and key personnel. Lenders assess the team’s ability to execute the plan and manage the business successfully.

10. Clearly Defined Loan Purpose:

    • Specific explanation of how the loan funds will be used (e.g., equipment purchase, working capital, expansion, real estate acquisition, debt consolidation). The purpose must align with prudent business operations and growth.

11. Minimum Time in Business:

    • Many lenders require the business to have been operating for a minimum period, typically at least 2 years, to establish a track record. Requirements vary significantly by lender and loan type (startups face higher hurdles).

12. Good Standing & Compliance:

    • Proof that the business is in good standing with state and local authorities.
    • Compliance with relevant industry regulations.

13. Adequate Insurance:

    • Proof of necessary business insurance (e.g., general liability, property, key person insurance) protecting the business assets and lender’s interest (e.g., in collateral).

14. Disclosure of Existing Debts:

    • Full disclosure of all business and personal outstanding debts, obligations, and loans currently held by the business and owners. This includes terms, balances, and monthly payments.

15. Strong Debt Service Coverage Ratio (DSCR):

    • Calculation showing business cash flow is significantly greater than debt obligations (existing + proposed loan). A ratio above 1.25x is generally considered strong, but requirements vary.

These requirements form the core documentation and eligibility criteria lenders use to assess risk and determine loan approval, terms, and amounts. Specific requirements can vary considerably between traditional banks, online lenders, credit unions, and Small Business Administration (SBA) lenders.