Most people believe getting approved for a small business loan is mostly about credit score.
Credit matters. But it’s not the main factor.
Banks care about risk.
They want to know one thing:
Will this business reliably generate enough money to repay the loan without defaulting?
If you are applying for financing to buy a business, expand one, or stabilize operations, here’s what lenders truly evaluate — and what many applicants misunderstand.
1. Cash Flow Is King (Not Revenue)
Revenue looks impressive.
Cash flow determines survival.
Banks evaluate your ability to repay using something called Debt Service Coverage Ratio (DSCR).
The formula:
Net Operating Income ÷ Total Debt Payments
If your business generates $12,000 per month and total debt obligations equal $10,000, your DSCR is only 1.2.
Most lenders want to see at least 1.20–1.25.
That means your business must produce 20–25% more than required loan payments.
If your cash flow is tight, approval becomes difficult — even if revenue is high.
This is why I emphasize cash flow over sales volume in
Why Poor Bookkeeping and Cash Flow Kill Small Businesses.
A busy restaurant can still be financially fragile.
2. Operating History Under Current Ownership
If you are buying an existing business, banks do not automatically trust prior performance.
They want to see:
• 1–2 years of tax returns
• Consistent revenue under your ownership
• Clean financial statements
• Stable expense patterns
Even if the previous owner made strong profits, lenders evaluate whether you can maintain those results.
This is one of the hidden difficulties of buying instead of starting from scratch, which I discuss in
Buying a Small Business vs Starting From Scratch.
Buying does not instantly improve bank confidence.
3. Personal Financial Stability
Most small business loans require a personal guarantee.
That means your personal finances are part of the decision.
Banks review:
• Personal credit score
• Mortgage obligations
• Existing loans
• Debt-to-income ratio
• Personal tax returns
If your personal finances are strained, the bank assumes higher risk.
Even a strong business model can be rejected if the owner’s personal obligations are heavy.
That’s why borrowing should be evaluated carefully, as explained in
Is Taking a Loan to Start a Small Business a Mistake?.
Approval is not just about business optimism.
4. Working Capital After Closing
One major red flag for banks is when buyers use every dollar available for the down payment.
Lenders want to see liquidity after closing.
They want to know:
• Can you survive slow months?
• Can you handle unexpected inspections?
• Can you fix equipment failures?
• Can you manage compliance fees?
For example, compliance issues like health inspections or reinspection fees can create unexpected costs.
Without a cash cushion, small issues can create major financial strain.
This is why I explain emergency reserves in
How Much Cash You Really Need Before Buying a Small Business.
Liquidity protects both you and the lender.
5. Collateral and Asset Security
Traditional banks prefer secured loans.
That means they want collateral.
Collateral may include:
• Business equipment
• Commercial property
• Inventory
• Personal real estate
If the business fails, the bank wants recovery options.
This is why some buyers turn to seller financing arrangements instead of bank loans, which I describe in
Buying a Small Business Without a Traditional Bank Loan.
Collateral reduces bank risk — but increases personal exposure.
6. Industry Risk Profile
Not all industries are treated equally.
Restaurants, for example, are often considered higher risk because of:
• Thin margins
• High labor costs
• Health compliance exposure
• Equipment intensity
• Economic sensitivity
Banks may apply stricter underwriting standards to industries with higher failure rates.
Understanding the true startup and ownership cost is essential, which I detailed in
How Much It Really Costs to Start a Small Food Business in California.
If your industry is volatile, your financials must be stronger.
7. Documentation and Transparency
Banks want organized documentation.
Sloppy bookkeeping signals risk.
They expect:
• Profit & Loss statements
• Balance sheets
• Business tax returns
• Personal tax returns
• Lease agreements
• Vendor contracts
Inconsistent records are one of the fastest ways to get rejected.
Many early mistakes buyers make — especially under pressure — are covered in
Mistakes I’d Avoid If I Bought a Small Business Again.
Preparation increases approval probability.
8. Realistic Projections
Banks examine whether your projections are realistic.
Overly optimistic revenue forecasts reduce credibility.
Lenders prefer conservative estimates supported by:
• Historical data
• Market research
• Expense breakdowns
• Cash flow planning
Optimism does not replace math.
Final Thoughts
Banks are not evaluating your dream.
They are evaluating probability.
Strong cash flow, sufficient liquidity, stable personal finances, and realistic projections improve your chances.
