Guide
How to qualify for a business loan: the five things underwriters actually check
Lending decisions look arbitrary from the outside. They are not. Five factors decide almost every file, and they are not weighted the way most borrowers assume.
Borrowers overwhelmingly assume credit score is the gate. It is not. It is a gate, and it comes second. The thing that decides most files is whether the cash flow covers the payment, and it is the factor people are least prepared to discuss.
1. Cash flow, and the ratio that measures it
Underwriters compute a debt service coverage ratio: cash flow available for debt service, divided by total annual debt payments including the new loan.
DSCR = (Net income + interest + depreciation + amortization + owner add-backs) ÷ (All annual principal and interest payments, including the new loan)
| DSCR | How a lender reads it |
|---|---|
| Below 1.00x | The business does not generate enough to pay its debts. Decline. |
| 1.00x to 1.14x | No margin for a bad quarter. Decline or heavily conditioned. |
| 1.15x to 1.24x | Workable at many lenders, especially with strong collateral. |
| 1.25x to 1.50x | Comfortable. This is the target. |
| Above 1.50x | Strong. You have negotiating room on rate and terms. |
Two implications people miss. First, extending the term raises DSCR without changing anything about your business, which is the strongest practical argument for SBA financing. Second, existing debt is in the denominator — paying off a high-payment obligation before you apply can matter more than any other single action.
2. Personal credit
For any business under roughly $5 million in revenue, the owner's personal credit is treated as a proxy for how the business will behave. Rough thresholds:
- 720+ — every door is open; you should be negotiating, not hoping.
- 680 to 719 — qualifies at most banks and SBA lenders.
- 640 to 679 — SBA is possible at a subset of lenders; online lenders are comfortable.
- 600 to 639 — online lenders, equipment financing, factoring.
- Below 600 — factoring, equipment financing, CDFIs, merchant advances.
Pull all three bureau reports before you apply, not after. Errors are common, and disputing one takes thirty days you will not have once a lender is waiting.
3. Time in business
| Age of business | What opens up |
|---|---|
| Pre-revenue | Microloans, CDFIs, equipment financing, personal credit, SBA with a large injection |
| 6 to 12 months | Online lenders, factoring, equipment financing |
| 1 to 2 years | Most online lenders, some banks, SBA at a subset of lenders |
| 2+ years | Everything, including banks and mainstream SBA |
| 5+ years | Best pricing and the strongest negotiating position |
Two years of filed tax returns is the single most common hard requirement in the industry. If you are at twenty months, waiting four more can be worth several percentage points.
4. Collateral, and what it is really for
Collateral is not what gets you approved. Cash flow is. Collateral determines how far a lender will stretch on everything else, and it changes your pricing.
- Commercial real estate — the strongest. Advance rates of 65% to 90%.
- Equipment — good, if it is standard and resaleable. 50% to 80% of orderly liquidation value.
- Accounts receivable — good if your customers are creditworthy. 70% to 85%.
- Inventory — weak. 20% to 50%, because liquidation values are poor.
- Personal residence — used routinely on SBA loans above $500,000 where you have meaningful equity. Decide how you feel about this before you are at a closing table.
5. The story
Every file has something that needs explaining: a loss year, a dip in 2020, a customer who left, a personal credit event. Underwriters are not looking for a perfect file. They are looking for a borrower who understands their own numbers.
Write the explanation before you are asked. One page: what happened, what you did about it, what the numbers have done since. A borrower who volunteers this reads as competent. A borrower who is surprised by the question reads as someone who does not watch their business.
What to do in the ninety days before you apply
Clean up the balance sheet
Reconcile everything. Remove or properly classify owner draws, personal expenses, and loans from related parties. An unreconciled balance sheet is the most common cause of delay.
Pay down or restructure high-payment debt
It sits in the DSCR denominator. Retiring a $2,000-a-month obligation can move your coverage ratio more than a good quarter would.
Stop the small credit inquiries
Every application for a card or an advance shows up. Six inquiries in ninety days reads as distress regardless of your score.
File the returns
Not on extension. Filed. Nothing moves before this.
Build the thirteen-week cash forecast
You will need it, and building it frequently changes what you decide to ask for.
Questions people actually ask
What is the minimum credit score for a business loan?
There is no universal minimum. Banks and SBA lenders mostly want 680 and up, online lenders will work from 600 and sometimes 550, and equipment financing and invoice factoring go lower still because they lean on collateral. Below 600 the question changes from what rate to which product.
Does applying hurt my credit score?
Most prequalifications are a soft pull with no effect. A formal application is usually a hard pull, worth a few points. Several hard pulls in a short window for the same purpose are often treated as one by scoring models — but lenders reading your report still see the count, and many inquiries reads badly regardless of the score effect.
Can I get a business loan if my business lost money last year?
Yes, if you can explain it and the trend has turned. Lenders look at trajectory, not just the last line. A loss caused by a one-time event, followed by profitable interim financials, is a very different file from three years of gradual decline. Bring interim statements and the written explanation.