Business loan requirements: What factors influence your approval?

Accessing capital for your business is just as stressful as it is exciting. 

Many business owners aren’t sure what they qualify for, what lenders look for, or why some applications get approved while others are denied. The reality is that business loan requirements vary from lender to lender. Each has different criteria, and seemingly small details – like where your business operates or how much funding you request – can make or break your chances of approval.

Our guide breaks down the key factors that impact eligibility, from business structure to loan request amounts, so you can approach the financing process with clarity and confidence. 

The key factors lenders use to evaluate your business

Lenders use a few key financial metrics to determine whether a business qualifies for their financing programs and how much they’re willing to approve. These benchmarks help them assess risk, ensuring a business has the financial strength to handle repayment.

Before looking at other factors like business structure or location, lenders start with the fundamentals: revenue, cash flow, credit history, and time in business. These metrics provide a snapshot of your company’s financial health and play a major role in your loan approvals.

1. Revenue and cash flow

Lenders want to see consistent revenue and positive cash flow. This tells them your business generates enough income to cover expenses, including loan payments. While specific requirements vary, National Business Capital prefers businesses with at least $500,000 in monthly revenue.

• Rule of thumb: Businesses typically qualify for 80-100% of their average monthly deposit volume with most market lenders. If your business has an average monthly balance of $500,000, you might qualify for anywhere from $500,000 to $750,000, so long as you check all other relevant boxes. At National Business Capital, businesses can qualify for as high as 150%.

2. Profitability and debt service coverage

Revenue alone isn’t enough—lenders also look at profitability and how much of your income is available to cover new debt. The debt service coverage ratio (DSCR) measures this by comparing your available income to your debt obligations.

• Example: If your business generates $2MM per month and has $400,000 in monthly operating expenses, that leaves $1.6MM in profit. If your current loan payments total $800,000 per month, your debt service coverage ratio (DSCR) is 2.0 – meaning you have twice the income needed to cover your debt obligations.

3. Credit history

Both business and personal credit scores can impact loan eligibility. While some lenders work with lower credit scores, having a score of 600+ improves your options.

• Business credit: If your business has an established credit profile, lenders will check its PAYDEX Score and other business credit reports.
• Personal credit: If your business doesn’t have strong credit yet, lenders may evaluate your personal credit score instead.

4. Time in business

The longer your business has been operating, the more predictable its financial patterns are. A more established business poses less risk to a lender than a newer one because, in theory, they have a stronger foothold and more experience. National Business Capital requires at least two years in operation, but other lenders work with newer companies and startups.

5. Industry risk

Lenders assess industry risk when determining loan eligibility, and businesses in certain industries may face more scrutiny or stricter requirements. For example, industries with volatile revenue patterns, such as hospitality, construction, or seasonal retail, can be seen as higher risk due to fluctuating cash flow.

If your business operates in a high-risk industry, you may need to provide stronger financials, demonstrate consistent revenue, or seek funding from non-bank lenders that specialize in working with businesses in your sector.

What this means for you

These primary business loan requirements determine not just whether you get approved but also how much funding you can access and on what terms. Since each lender has its own focus and risk tolerance, approval criteria aren’t universal—what one lender sees as a red flag, another might consider an acceptable risk.

If your business falls short in one area, that doesn’t mean funding is out of reach. It just means you may need to explore different lenders, adjust your request, or strengthen certain aspects of your financial profile to improve your approval odds.

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Now, let’s take a closer look at additional factors – like business structure and location – that can also impact your approval odds.

Lesser known requirements for business loan eligibility

There are headline business loan qualifications, and there are those that impact your eligibility in the background.

Here are a few of the small details that play a major role in your company’s approval:

Business location: Residential vs. commercial

Where your business operates plays a significant role in loan eligibility. Lenders often consider home-based businesses riskier because they typically have lower overhead and less financial commitment to their operations.

• Home-based businesses: Some lenders—and even certain state regulations—prohibit funding for home-based businesses due to their perceived instability.
• Commercial locations: Businesses with a dedicated commercial space often demonstrate more financial investment and commitment, making them more attractive to lenders. If you operate from home but are considering a commercial location, securing a lease could improve your loan options.

Business structure: How your company is set up matters

Your business entity type impacts your eligibility and the protections you have as an owner.

• Sole proprietors: These businesses lack legal separation between personal and business finances, making them riskier in the eyes of lenders. Some lenders won’t work with sole proprietors at all.
• LLCs, S Corps, and C Corps: Structured businesses offer liability protection and tax benefits, making them more attractive to lenders. If you’re currently a sole proprietor, forming an LLC or corporation can improve your funding options – and it can often be done quickly.

Loan request amount: Finding the right number

Asking for the right loan amount is critical. Many businesses unknowingly disqualify themselves by requesting more than their financials can support.

• Rule of thumb: Lenders often approve businesses for 100-150% of their average monthly deposit volume. If you request significantly more, you might be denied altogether. For example, if a business owner needed $200,000 but only qualified for $150,000 based on their financials, requesting a large amount, like $400-500,000, might result in an immediate denial, even though you would have taken less than you requested.

Collateral vs. no collateral: How it impacts your approvals

Collateral plays a significant role in determining not just whether a business qualifies for financing but also the loan amount, interest rate, and repayment terms. When a business offers collateral—such as real estate, equipment, or other valuable assets—it provides security for the lender, reducing their risk. In return, lenders can offer:

• Higher loan amounts since they have assets to recover if the business defaults
• Lower interest rates, often based on prime rates with smaller margins
• Customizable repayment terms, allowing for unique repayment needs
• More flexible underwriting, as strong collateral can sometimes offset weaknesses in credit or cash flow

For businesses that can pledge assets, collateral-backed loans often provide the lowest rates and access to larger funding amounts. However, they also require a blanket lien on business assets, meaning the lender can claim those assets if the loan isn’t repaid.

What if you don’t have collateral?

If a business lacks significant assets or prefers not to pledge collateral, approval will rely more on revenue and cash flow strength. Alternative financing options, like revenue-based financing or subordinated debt, allow businesses to secure funding without putting up collateral, but:

• Loan amounts are based on a company’s revenue and ability to repay, rather than the value of the asset and collateral coverage
• Interest rates tend to be higher due to increased lender risk
• Repayment terms may be shorter, with payments tied to revenue fluctuations

Collateral gives lenders confidence, which translates into more favorable loan terms. But even without it, businesses with strong revenue and cash flow can still qualify for financing—it just requires working with the right lenders specializing in asset-less funding, like National Business Capital.

Other important financing-related information to know

Beyond the core qualifications, several other factors influence your financing experience, including how credit inquiries work and what determines the cost of borrowing. 

Understanding these details can help you make informed decisions when evaluating loan options.

Soft pulls vs. hard pulls: How credit inquiries impact you

One of the biggest concerns business owners have when applying for financing is how credit inquiries affect both their personal and business credit. The good news? Most commercial financing options do not impact your personal credit the way consumer loans do.

Unlike personal loans, most commercial financing does not report to personal credit bureaus unless the loan defaults. Instead, business financing activity is typically reported to business credit agencies, helping to build your company’s credit profile. This means responsible borrowing can strengthen your business credit without affecting your personal credit standing.

• Soft credit pulls: Most lenders, including National Business Capital, use a soft pull when reviewing applications. Soft pulls do not impact your credit score and are only visible to you. They stay on your credit report for one year but do not affect your ability to apply for other financing.
• Hard credit pulls: Some lenders conduct a hard pull at closing, which is reported to the credit bureaus and visible to anyone who checks your credit. Hard inquiries stay on your credit report for two years and can slightly lower your credit score.
• Trimerge credit pulls: This is when all three credit bureaus are pulled at once. While common in consumer lending, commercial financing typically reports hard inquiries to just one bureau.

Tip: Always ask lenders upfront whether they do a soft or hard pull, especially at different stages of the process. At National Business Capital, we only conduct a soft pull upfront and notify clients before any hard inquiry occurs.

What determines the cost of borrowing?

The cost of financing varies widely based on both market conditions and specific business factors. Here’s what influences your loan’s interest rate and terms:

1. The cost of money for lenders

Lenders don’t just create money; They borrow it from banks or investors, which means their rates are influenced by the prime rate and other market conditions. If borrowing costs increase for them, interest rates on any business loans they offer also rise.

2. Business-specific factors

When you apply for a loan, your business’s financial profile determines the terms you receive. Lenders use this information to determine the level of risk they’d take on by lending to you.

• Time in business: More established businesses often qualify for lower rates.
• Business & personal credit history: A strong credit profile can lead to better terms.
• Cash flow & cash balances: Lenders want to see steady revenue and healthy reserves.
• Existing liabilities: More debt means higher risk, which can increase rates.
• Industry & seasonality: Riskier or highly seasonal industries may face higher costs.

3. The loan structure

The structure of your loan also impacts the cost:

• Lender-specific pricing: Different lenders have different rates based on their risk models, service fees, etc.
• Loan term length: Shorter-term loans generally have lower interest rates, while longer-term financing may have higher rates but lower monthly payments.

By understanding these factors, you can better evaluate financing offers and choose the best option for your business’s needs. If you’re ready to explore your options, apply today to connect with a Business Finance Advisor who can guide you through the process.

Explore capital options with National Business Capital’s expert advisors

Securing a business loan involves many moving parts, and understanding what lenders look for can make all the difference. Whether you’re unsure about eligibility, the right loan amount to request, or how different factors impact your approval, having a knowledgeable professional by your side can simplify the process.

At National Business Capital, our expert advisory team helps you navigate your financing options, ensuring you get the best terms for your business’s needs. With a range of direct lending solutions, a network of lending partners, and a streamlined process that won’t impact your credit upfront, we make securing the right funding easier and more strategic than ever.

Ready to take the next step? Apply today to connect with a Business Finance Advisor and discover the best loan options for your business.