How to Qualify for a Business Term Loan in the U.S.

When you apply for a business term loan in the U.S., a lender is answering two questions: can this business repay, and is it likely to? Everything on the application, from the bank statements to the credit pull, feeds one of those two answers.

Knowing the criteria before you apply lets you fix weak spots first instead of collecting a decline and starting over.

Most underwriting comes down to four things:

• Credit profile: your personal credit score and, where it exists, your business credit file.
• Time in business: how long the company has been operating and generating revenue.
• Revenue: annual and monthly sales, and whether they are stable or growing.
• Cash flow: whether deposits comfortably cover your existing obligations plus the new payment.

Traditional banks usually want two or more years in business and meaningful annual revenue. Alternative lenders are more flexible and will often consider a business with six months of history, as long as the deposits are consistent. Flexibility usually comes with a higher cost, so it is worth comparing structures rather than taking the first offer.

A mid-range credit score does not automatically end an application. A business with steady deposits and growing revenue can offset a score that would be a problem on its own, especially with alternative lenders.

Before you apply, pull your personal credit reports and read them line by line. Errors, old accounts reported as open, or a collection that has already been paid can drag a score down for no good reason. Disputing an error takes a few weeks, so start early. Also keep revolving balances low: utilization under about 30 percent of your limits is a widely used benchmark.

Lenders translate cash flow into a ratio, often called the debt service coverage ratio: money available to pay debts divided by the total of your debt payments. Many lenders look for a ratio of roughly 1.25 or higher, meaning the business brings in about a quarter more than its payments require.

You can estimate this yourself. Take your average monthly net deposits after operating costs, add up existing loan, lease and card payments plus the proposed payment, and divide. If the number is thin, a smaller amount or a longer term lowers the payment and improves the picture.

Underwriters want to see the business as it really operates. Have these ready before you apply:

• Three to six months of business bank statements.
• Your most recent business tax return or year-end financial statements, if available.
• A government-issued ID and basic business registration details.
• A list of existing debts with balances and monthly payments.

Clean statements matter more than people expect. Consistent daily deposits, a healthy average balance and few overdrafts tell a better story than a profit-and-loss statement alone. If a statement shows a one-time deposit or a large unusual withdrawal, a one-line explanation saves an underwriter a question.

Lenders are more comfortable when they can see where the money goes and how it pays itself back. "Working capital" is acceptable, but "a second delivery van that adds eight routes a week" or "inventory for the spring season, with signed purchase orders" is stronger.

Put the purpose, the amount and the expected return in two or three sentences. The exercise also protects you: if you cannot explain how the loan pays for itself, that is worth knowing before you sign.

• Check your personal credit reports for errors.
• Download the last three to six months of statements and read them as a lender would.
• Calculate your coverage ratio at two or three loan sizes.
• Write down the purpose, amount and expected return.
• Compare more than one structure: a term loan, equipment financing and a line of credit solve different problems.

lendfloCapital matches business owners with term loans, equipment financing and working capital through one short application. There is no cost to apply, and the initial review uses a soft credit pull.