What are the main eligibility requirements for a business loan?

I’m planning to apply for a business loan within the next few months to fund expansion for my small manufacturing business, which has been operating for three years with consistent annual revenue. However, I’m nervous about the approval process because my personal credit score is borderline due to past medical expenses, and I’m unsure if lenders will scrutinize my business financials too heavily. Could you provide a detailed breakdown of the core eligibility requirements most banks and alternative lenders typically consider—including minimum credit score thresholds, revenue/operating history needs, mandatory collateral, debt service coverage ratios, required documentation (like tax returns and business plans), and whether industry-specific risk factors or business structure (LLC vs. sole proprietorship) significantly impact chances of approval? Also, how important is cash flow stability versus profitability in these evaluations?

The main eligibility requirements for a business loan typically include:

1. Strong Personal Credit Score: Lenders assess the owner(s)’ creditworthiness, often requiring a minimum score (e.g., 680+ is common, but varies significantly by lender and loan type). A high score indicates responsible personal financial management.
2. Solid Business Credit History: Established businesses need a positive history of paying suppliers, vendors, and lenders on time. Lenders review reports from agencies like Dun & Bradstreet, Experian Business, and Equifax Business.
3. Sufficient Time in Operation: Most traditional lenders require businesses to operate for at least 2 years to establish a track record of stability and success. Startup loans may have different requirements.
4. Minimum Annual Revenue: Businesses must generate consistent, sufficient revenue to demonstrate the ability to make loan payments. Requirements vary widely (e.g., $100k to $250k+ annually).
5. Positive Cash Flow: Lenders prioritize businesses with strong, predictable cash flow sufficient to cover the new loan payment alongside existing operational expenses.
6. Demonstrated Profitability: Showing consistent profits over time significantly strengthens the application, as it indicates the business model works and generates surplus funds beyond costs.
7. Collateral: Many loans require assets (real estate, equipment, inventory, accounts receivable) to secure the loan. The value and type of collateral influence loan amount and terms. Unsecured loans rely solely on creditworthiness.
8. Business Plan & Purpose: A clear, well-researched business plan detailing the loan’s purpose (e.g., expansion, equipment purchase, working capital) is crucial. It must show how the funds will lead to increased revenue or efficiency to repay the loan.
9. Personal Guarantee: Most lenders require the business owner(s) to personally guarantee the loan, making them personally liable for repayment if the business defaults.
10. Industry Experience: Relevant industry experience by the owner(s) is often viewed positively, especially for startups or businesses in new ventures.
11. Legal Business Structure: The business must be legally registered (e.g., LLC, Corporation, Sole Proprietorship). Documentation like articles of incorporation/organization and an EIN number is required.
12. Low Debt-to-Income (DTI) Ratio: Lenders calculate the business’s total monthly debt obligations against its monthly gross revenue. A lower DTI ratio (e.g., below 40-45%) indicates greater capacity to handle new debt.
13. Accounts Receivable & Inventory: For asset-based lending, the quality, value, and collectability of accounts receivable and inventory may be key factors.
14. Operational Stability: Consistent sales, stable customer base, and operational efficiency signals lower risk to the lender.
15. Compliance and Licenses: The business must be fully compliant with all relevant local, state, and federal regulations and possess necessary licenses and permits.

Important Notes:

• Variation: Specific requirements vary significantly by lender (bank, credit union, online lender, SBA), loan type (term loan, SBA loan, line of credit, equipment financing), loan amount, and the perceived risk of the business and industry.
• Documentation: Extensive documentation is always required, including personal and business tax returns, financial statements (balance sheet, income statement, cash flow statement), bank statements, business licenses, and legal documents (lease agreement, contracts).
• Ownership: Lenders may require a minimum ownership stake (e.g., 20%+) from guarantors.