What banks look for when you ask for a business loan
Banks do not lend based on your idea or your confidence. They lend based on whether they believe you will repay them. To decide that, a bank examines your personal credit history, your business's financial records, the amount of your own money you have invested in the business, what you will use the loan for, and what you can pledge as collateral if the business fails.
The process typically takes two to six weeks from application to a decision, though some banks move faster and others slower depending on loan size and how complete your paperwork is. You will need to provide documents that prove your business exists, that it makes money, and that you personally have managed debt responsibly in the past.
Different banks have different thresholds. A community bank may lend to a newer business with weaker financials than a large national bank will. The loan amount you can get, the interest rate you pay, and the repayment timeline all depend on the bank's assessment of your risk.
Key Takeaways
- Banks require personal tax returns for the past two years, business tax returns or profit-and-loss statements, and a business plan that describes what you will do with the money.
- Your personal credit score matters as much as your business's financial performance, because the bank can pursue you personally if the business cannot repay.
- Most banks want to see that you have invested your own money into the business first, typically 20 to 30 percent of the total loan amount.
- Collateral—equipment, real estate, inventory, or accounts receivable—reduces the bank's risk and often lowers your interest rate.
- Community banks and credit unions often have simpler requirements than national banks and may move faster on decisions.
Documents you need before you walk in
Bring your personal tax returns for the past two years. The bank will check whether you have reported business income, whether you pay taxes on time, and whether you carry other debt. If you are self-employed or own the business, the bank treats your personal finances and business finances as linked.
Bring your business tax returns for the past two years if your business has filed them. If your business is newer than two years old, bring whatever tax returns exist. If you have not filed business taxes yet, bring your profit-and-loss statements—the records showing what money came in and what went out. A spreadsheet counts if it is organized and covers at least the past 12 months.
Bring a business plan or a one-page summary of what you will use the loan for. The bank needs to know whether you are buying equipment, paying off existing debt, expanding to a new location, or covering operating costs. Be specific: "expand the business" is too vague. "Buy two industrial ovens and hire two bakers to open a second location" is what the bank wants to hear.
Bring your business license, articles of incorporation or formation if you have them, and a list of what collateral you can pledge. Collateral is anything of value the bank can take and sell if you default—equipment, vehicles, real estate, inventory, or even accounts receivable (money your customers owe you).
How your credit score and personal finances factor in
Your personal credit score is often more important than your business's age or size. Banks assume that if you have defaulted on personal credit cards or car loans, you are a higher risk to default on a business loan. Most banks want to see a personal credit score of at least 680, though some will go lower and others require 700 or higher.
The bank will pull your personal credit report and look for late payments, collections accounts, or bankruptcy. A single late payment from five years ago is less damaging than a recent one. A bankruptcy from seven years ago is less damaging than one from two years ago. If you have a recent negative mark, explain it in writing—a job loss, a medical emergency, or a divorce—and show what you did to recover.
The bank will also look at your personal debt-to-income ratio. If you already carry high monthly payments on a car loan, mortgage, or credit cards, the bank may decide you cannot afford to add a business loan payment on top. Calculate your total monthly debt payments and divide by your gross monthly income. Most banks want to see a ratio below 40 percent.
How much of your own money you need to put in
Banks rarely lend 100 percent of what a business needs. They want to see that you have skin in the game—that you have risked your own money. This shows the bank that you are serious and that you will work hard to make the business succeed because you have your own money at stake.
Most banks want you to contribute 20 to 30 percent of the total project cost from your own savings. If you need $100,000 to buy equipment and hire staff, the bank may lend you $70,000 if you can show you have $30,000 of your own money going in. Some banks will go to 80 percent lending if you have strong credit and collateral. Others will not go above 70 percent.
Your own money can come from personal savings, a second mortgage on your home, or investment from a business partner. It cannot come from another loan. The bank will ask where the money came from, and if you borrowed it, they will count that as debt against you.
Collateral and what happens if you cannot repay
Collateral is property the bank can seize and sell if you stop making payments. Offering collateral lowers your interest rate because it lowers the bank's risk. Without collateral, the bank can only sue you personally and try to collect from your wages or bank account—a slower and less certain process.
Common collateral for business loans includes equipment you are buying with the loan, vehicles, real estate, inventory, or accounts receivable. If you own your building, you can pledge it. If you have equipment worth money, you can pledge it. The bank will appraise the collateral and typically lend only 50 to 80 percent of its appraised value, depending on how easy it is to sell.
If you default, the bank takes the collateral and sells it. If the sale does not cover what you owe, the bank can still sue you for the difference. This is called a deficiency judgment, and it means you remain personally liable for the debt even after the bank takes the collateral.
Where to look and how to compare
Start with your own bank or credit union. They already know you, have your account history, and may move faster than a bank where you have no relationship. Call the business lending department and ask what documents they need and what their timeline is.
Contact community banks in your area. They often have simpler requirements than national banks and may be willing to lend to newer businesses or businesses with lower revenue. The Small Business Administration (SBA) maintains a list of SBA-preferred lenders in your state, which you can find on sba.gov.
Compare interest rates, fees, and repayment terms across at least three lenders. A bank may charge an origination fee (1 to 3 percent of the loan amount), an appraisal fee, or a prepayment penalty if you pay off the loan early. Ask about each one. A lower interest rate does not matter if the fees are high.
Ask each bank about SBA loans. The SBA does not lend directly; it guarantees loans made by banks. An SBA may provide means the bank takes less risk, so they may lend to you when they would not otherwise, and they may charge a lower rate. SBA loans typically have longer repayment terms (up to 10 years for equipment, up to 25 years for real estate) than conventional bank loans.
What to do if a bank says no
If a bank denies you, ask why. The bank must tell you the reason—usually weak credit, insufficient collateral, or concerns about the business's ability to repay. If the reason is credit-related, you can work on your credit score over several months and reapply. If the reason is collateral, you can offer more collateral or find a co-signer.
A co-signer is someone who agrees to repay the loan if you cannot. The co-signer must have good credit and income. The bank will evaluate the co-signer's finances as if they were the borrower. This is a serious commitment for the co-signer—if you default, the bank will pursue them.
If you cannot get a conventional bank loan, look into credit union loans, online lenders, or SBA microloans (loans under $50,000 for very small businesses). These routes often have higher interest rates or stricter terms, but they may be available when a bank says no. Weigh the cost carefully before you commit.
Frequently Asked Questions
How long does it take to hear back from a bank after I submit my application?
Most banks give you an answer within two to six weeks. Community banks and credit unions often move faster, sometimes in one to two weeks. Large national banks may take longer, especially for loans over $250,000. Call the bank after one week to confirm they received everything and ask for an estimated decision date.
Can I get a business loan if my business is less than a year old?
Yes, but it is harder. Banks prefer to see at least one year of tax returns or profit-and-loss statements. If your business is newer, bring bank statements showing deposits from customers, invoices showing sales, and a detailed business plan. A strong personal credit score and collateral help offset the lack of business history.
What if I do not own real estate or equipment to use as collateral?
You can pledge accounts receivable (money your customers owe you), inventory, or a personal may provide backed by your home if you own it. You can also find a co-signer with collateral or strong income. Some banks will lend on character and cash flow alone if your credit is excellent and your business is profitable, though the interest rate will be higher.
Do I need a business plan to get a loan?
Most banks want to see a one-page summary of what you will use the money for and how the business will repay it. A full formal business plan is not always required, but it helps if your business is new or if you are asking for a large amount. The bank needs to understand the purpose and the repayment source.
What is the difference between a bank loan and an SBA loan?
A bank loan is money the bank lends from its own funds. An SBA loan is money a bank lends, but the Small Business Administration guarantees to repay a portion if you default. The SBA may provide makes the bank more willing to lend and often results in lower rates and longer repayment terms. SBA loans typically take longer to process because of the extra paperwork.