What banks actually look at when you ask for a business loan

Banks do not lend based on your idea or your passion. They lend based on whether they believe you will repay them. That means they examine your personal credit history, your business finances (if you have them), how much of your own money you are putting in, what you will use the money for, and whether you own assets they can take if you default. The stronger your position on each of these, the more likely you are to get approved and the lower your interest rate will be.

The process typically takes four to eight weeks from process to funding, though some banks move faster and others slower depending on how complete your paperwork is and how busy they are. You will need to gather documents before you walk in, and the bank will ask questions designed to find reasons to say no. Your job is to make it harder for them to do that.

Key Takeaways

  • Banks require a personal credit score (usually 680 or higher), proof of business income or a detailed business plan, and collateral or a personal may provide before they will consider lending.
  • You will need to show tax returns, bank statements, and a breakdown of how you plan to use the money — vague requests get rejected.
  • The amount you can borrow depends partly on how much of your own money you are putting into the business, so banks expect you to have skin in the game.
  • A business plan does not need to be fancy, but it needs to show you have thought through your market, your costs, and how you will make money.
  • If your personal credit is weak or your business is brand new, you may need a co-signer or to look at alternative lenders like credit unions or the Small Business Administration.

Documents you need to gather before you explore

Banks will ask for the same core set of documents no matter which one you walk into. Have these ready before you call or visit: your personal tax returns for the last two years, your business tax returns if your business already exists, recent business bank statements (usually the last three to six months), a personal financial statement showing what you own and what you owe, and your personal credit report (you can get this free from annualcreditreport.com).

You will also need to write down exactly what you plan to use the money for. "Grow my business" is not specific enough. "Buy three new pieces of equipment totaling $45,000" or "Hire two employees and cover their salary for six months" is what they want to see. If you are starting a new business, you will need a business plan that covers your market, your competition, your pricing, and your projected income and expenses for the first year or two.

Bring proof of your business structure: a copy of your business license, articles of incorporation if you formed an LLC or corporation, or your DBA (doing business as) registration if you operate as a sole proprietor. If you own property or vehicles, bring documentation of those assets, because banks often ask for collateral.

How your credit score and personal finances affect your chances

Most banks will not lend to someone with a credit score below 680, though some will go lower if other parts of your process are strong. Your score tells the bank whether you have paid past debts on time. If you have missed payments, defaulted on loans, or filed for bankruptcy in the last seven years, expect the bank to ask detailed questions about what happened and why it will not happen again.

The bank will also look at your debt-to-income ratio — how much you already owe compared to how much you earn. If you are already carrying high credit card balances, car loans, or mortgage payments, the bank may decide you cannot afford another payment. They will calculate whether adding a new loan payment would push you over the threshold they use (often 43 percent of your gross monthly income).

Your personal savings matter too. Banks want to see that you have money set aside — usually three to six months of personal living expenses. This shows you can weather a slow month without defaulting on the loan. If you are asking to borrow $100,000 but have no savings and no assets, the bank sees you as a higher risk.

What banks want to know about your business itself

If your business already exists, the bank will examine your business tax returns and bank statements to see whether you are actually making money. They will calculate your profit margin, look at whether your revenue is growing or shrinking, and check whether you have enough cash flow to cover a new loan payment on top of your existing expenses.

If your business is brand new (less than two years old), most traditional banks will not lend to you at all, or will only lend if you have significant collateral or a strong co-signer. In this case, you may need to look at the Small Business Administration (SBA) loan programs, which are designed for newer businesses and have more flexible requirements.

The bank will also want to understand your industry. Some industries are seen as higher risk — restaurants, for example, have high failure rates, so banks scrutinize them more carefully. If you are in a stable industry with predictable income, you have an advantage.

Collateral and personal guarantees

A personal may provide means you are personally responsible for repaying the loan if your business cannot. Most banks require this for small business loans, which means they can come after your personal assets if your business fails. This is why your personal credit score and assets matter so much.

Collateral is an asset the bank can take and sell if you default. Common collateral includes business equipment, inventory, real estate, vehicles, or accounts receivable (money your customers owe you). The bank will typically lend you 50 to 80 percent of the collateral's value, depending on how straightforward it would be to sell. Real estate is worth more to a bank than inventory, because real estate is easier to value and sell.

If you do not have collateral, some banks will lend on an unsecured basis, but the interest rate will be higher and the amount will be smaller. You may also need a co-signer — someone with good credit and assets who agrees to repay the loan if you do not.

The difference between banks, credit unions, and SBA loans

Traditional banks (Wells Fargo, Bank of America, Chase, and regional banks) have strict requirements and move slowly, but they offer competitive interest rates if you may have access to. Credit unions often have slightly more flexible standards and faster decisions, but you have to be a member. The SBA does not lend money directly — instead, it guarantees loans made by banks and other lenders, which means the lender takes less risk and can offer better terms to borrowers who might not otherwise may have access to.

SBA loans come in several types. A 7(a) loan is the most common and can be used for almost any business purpose. A microloan is smaller (up to $50,000) and designed for newer or smaller businesses. An SBA Express loan is processed faster but has a lower maximum amount. The tradeoff is that SBA loans require more paperwork and take longer to close, but they are worth considering if a traditional bank has turned you down.

Online lenders and alternative lenders exist, but they typically charge much higher interest rates (sometimes 20 to 40 percent annually) and have shorter repayment terms. Use these only if you have exhausted traditional options and understand the cost.

What happens after you submit your process

The bank will order a business credit report on your company (separate from your personal credit report) and may verify your income by contacting your accountant or requesting IRS transcripts. They will also run a background check and may call your customers or suppliers to verify that your business is real and operating as you described.

If the bank approves you, you will receive a loan offer letter that states the amount, the interest rate, the term (how long you have to repay), and any conditions you must meet before the money is disbursed. Read this carefully — some banks require you to inject your own money into the business first, or to maintain a minimum balance in a checking account with them.

Once you sign the loan agreement, the bank will fund the loan, usually within five to ten business days. Some banks disburse the money directly to you; others pay vendors or contractors directly if you are using the money for a specific purchase.

What to do if you are turned down

If a bank denies your process, ask why. The bank must provide a written explanation. Common reasons include insufficient credit score, insufficient business income, too much existing debt, or insufficient collateral. Some of these you can fix — paying down credit card balances, waiting a few months for your business to show more income, or finding a co-signer. Others, like a very recent bankruptcy, you cannot fix quickly.

If traditional banks have turned you down, explore SBA loans, credit unions, or community development financial institutions (CDFIs), which are nonprofit lenders that work with borrowers who do not may have access to for traditional bank loans. These lenders often have lower interest rates than online lenders and are more willing to work with newer businesses or borrowers with credit challenges.

Frequently Asked Questions

What credit score do I need to get a business loan from a bank?

Most banks require a personal credit score of 680 or higher, though some will go as low as 620 if other parts of your process are strong. A score above 720 significantly improves your chances and usually gets you a lower interest rate. Check your credit report before you explore so you know what the bank will see.

Can I get a business loan if my business is brand new?

Traditional banks rarely lend to businesses less than two years old. Your best options are SBA loans, which have programs designed for newer businesses, or credit unions, which sometimes have more flexible requirements. You may also need a co-signer with established credit and assets.

How much can I borrow?

The amount depends on your credit score, your business income, your collateral, and how much of your own money you are putting in. Banks typically lend between $25,000 and $500,000 for small business loans, though larger amounts are possible if you have significant collateral or a strong track record. SBA loans can go up to $5 million.

How long does it take to get approved?

Traditional banks typically take four to eight weeks from process to funding. SBA loans take longer, often eight to twelve weeks, because of additional paperwork and verification. Online lenders and some credit unions move faster, sometimes in two to four weeks, but charge higher interest rates.

What if I do not have collateral?

You can ask for an unsecured loan, but the interest rate will be higher and the amount will be lower. You can also find a co-signer with assets, or look at SBA loans, which sometimes lend without collateral if your business shows strong income and you have a solid personal credit score.