What banks look for in a small business loan

In the Federal Reserve's 2026 Report on Employer Firms, 38% of firms had applied for a loan, line of credit or merchant cash advance in the prior 12 months. Counting every kind of financing, 60% applied. Of those, 42% got the full amount, 36% got part of it and 22% got nothing. Common reasons for being turned down include too much debt already, low credit scores, too little collateral and weak sales.

Seasonal revenue, equipment that loses value and personal bills paid from the business account all make a lender careful. You can fix the last one today and plan around the other two.

This course teaches cash-first growth: build cash, rent before you buy, buy used. If you do borrow, a bank's yes is not enough by itself. The loan also has to pass your own five Borrowing Rules, listed below.

SCORE, the free small-business mentoring network, lists six things lenders weigh.

One bank's guide. PNC publishes what it looks for. These are that bank's guidelines, not rules every lender follows:

• 2 or more years in business under the same ownership, and longer for volatile or cyclical industries
• 5 or more years of on-time credit history preferred
• Earnings before interest, taxes, depreciation and amortization (EBITDA) above the yearly loan payments
• The owner's personal debt payments at or below 40% of gross income
• Total liabilities at or below 4 times net worth
• Little or no overdraft activity

The paperwork. Bank of America says it may ask for 2–3 years of business tax returns, 2 years of personal returns, a debt schedule, a personal financial statement, and a year-to-date profit and loss statement and balance sheet. It also says personal guarantees are common. B102.4 turns this list into a lender-ready file.

Debt service coverage ratio (DSCR) = cash available for debt payments ÷ total yearly debt payments.

Example (made-up numbers). A sealcoating company has $96,000 a year available for debt payments and $64,000 in yearly loan payments. $96,000 ÷ $64,000 = 1.50. That's $1.50 of cash for every $1 of payments.

Below 1.0, the business can't cover its payments from its own operations. At 1.0, every spare dollar goes to the lender and nothing is left for a bad month. Banks often prefer 1.25 or higher. Each lender sets its own minimum and decides what counts as cash available (its add-backs, such as depreciation), so ask.

If a lender's minimum were 1.25, this company's payments could total up to $76,800 a year ($96,000 ÷ 1.25). That's $12,800 more than today, about $1,067 a month. At an example rate of 8% over five years, that supports a new loan of about $52,600.

Read that as a ceiling. The Borrowing Rules treat 1.25 as your floor, and a yearly DSCR can look fine while January can't make the payment. Check the slow months with your 13-week forecast and Twelve-Month Paycheck (B102.1).

Lenders lend on the profit your returns show. Every business deduction lowers your tax, and it also lowers the profit on the return the lender reads. A return that shows little profit shows little room to repay.

Example (made-up numbers). Ray's shop earned $90,000 before writing off a $40,000 machine the year he bought it. The return shows $50,000. A lender that adds back depreciation, as many do, sees $90,000. One that doesn't sees $50,000. Same business, two very different answers.

That's a real trade-off, and it's a planning question. Talk with your CPA or enrolled agent a year before you plan to borrow. Ask which choices, such as when you take equipment write-offs or how you pay yourself, will show up on the returns the bank reads, and ask your lender which add-backs it allows.

A loan has to pass all five, every time:

1. It pays for something that earns money: equipment or a vehicle the business uses, property, or the short gap between finishing signed work and collecting for it. Never losses, back taxes or personal spending.
2. Your own numbers show it pays for itself with room to spare. Lenders often look for $1.25 of cash flow for every $1 of payments; treat that as your floor.
3. The payment fits your slowest months, not your best ones.
4. It's paid off before the equipment wears out, and you know how you'd keep paying if work stopped for a season.
5. You know the whole cost before you sign: the APR, every fee, the total of payments, any prepayment penalty, the personal guarantee, and what the lender can take.

Never: merchant cash advances or other daily-debit financing; borrowing to cover a loss; cashing out or borrowing from retirement to start or rescue a business.

• Ask for the reasons. If your business had $1 million or less in revenue, you can ask within 60 days, and the lender must give you the specific reasons within 30 days of your request.
• Fix what you can: separate accounts, current taxes, monthly books, lower card balances.
• Try lenders built for small businesses: SBA lenders, community development lenders and credit unions, with free help from an SBDC or SCORE (B102.8).
• Don't fill the gap with a merchant cash advance (B102.7).

• Small Business Development Centers: free business consulting; bring your DSCR and last year's numbers (find your SBDC).
• SCORE: free mentoring (score.org).
• SBA Lender Match: a free tool that connects you with SBA lenders (Lender Match).