If you’re looking to apply for a small-business loan, it is recommended to do your research in order to find the option that’s best for you. The process to get a business loan can be lengthy, especially loans backed by the Small Business Administration. Decisions should not be rushed and you should thoroughly understand all of the options available. Business loans have requirements that consist of providing multiple documents. In many cases, applicants are caught off guard by the requirements and delay their application further by taking time to gather the information required. Therefore, it is important to have the required documents ready before you approach a lender so you avoid any last-minute delays. By knowing what to expect, you can apply for the lending product that’s right for your business, be prepared for the process and avoid wasting time.
Here are four steps to help you prepare for applying.
1. Credit Score
As with most lending products, lenders use the personal credit scores of the applicants. Given that the proceeds of the loan are for the business, lenders also take into consideration the business credit scores of the business. In order to determine the lending risk, lenders require great credit scores as a factor for their decisions. For lenders, the lower the credit score, the higher the risk. The higher the credit score, the lower the risk. Typically, great personal credit scores are considered above 750 and great business credit scores are considered above 80. Although credit scores play a role in the final decision, they are not always a determining factor. Some lenders will still consider applicants with lower scores.
2. Proof of Revenue
Another important lending factor is proof of revenue. Lenders will ask to see documents confirming gross profit, net profit, operating costs, sales, and cash flow to get a clear picture of the revenue of the business. Lenders may ask to see financial statements, tax documents, and bank statements from current and previous years in order to get a clear picture of the revenue trends in your business. They also look at metrics such as the current ratio which measures your assets divided by liabilities to determine your company’s ability to repay. The priority for the lender is the applicant’s ability to repay. So the determining factor is based more on growth in cash flow, consistency in revenue, and having manageable debts.
3. Business Plan
Many lenders will require a recent copy of your business plan to get a better idea of your company’s goals. Lenders want to know where the proceeds of the loan will go to determine the risk involved. They’ll look at forecasts for stability, growth, and market share. They’ll also take into consideration the experience of company leaders and how they may influence the direction of the company. In many cases, they’ll also want to see a written plan for repayment along with an estimated timeframe.
As a way to minimize risk, many lenders will ask for collateral to secure the amount of the loan in the case of failure to repay. Company assets such as equipment, real estate, and even accounts receivable can be used. Lenders take into consideration the value of these assets vs the amount of the loan to assure that in the case of a loan default, they can sell those assets to cover the amount owed. Some lenders may require companies to provide a personal guarantee to their loan. In other cases, lenders may even ask business owners to pledge their personal assets as collateral.
Every lending source wants to reduce their risk when making a loan. One of the ways they do this is by getting additional financial collateral that secures the loan in case your business fails to meet its repayments. This is usually done in the form of a company’s accounts receivable, equipment or any other easy-to-sell assets.
One of the additional qualifications for a business loan may be for the company’s owner to provide a personal guarantee to their loan, or pledge additional collateral such as personal real estate or other financial resources.
Credit scores, annual revenue, business plan and collateral are the four cornerstones of most business loan applications. But note that there are many other supporting documents you’ll need to qualify for a business loan. They can include:
- your driver’s license
- any commercial leases
- business licenses
- personal and business tax returns
- business insurance plans
- payroll records
- incorporation documents
- other affiliated corporate ownership or
- current added financial obligations.
Although credit scores, proof of revenue, business plans, and collateral are common requirements for business loan applications, lenders will require other documentation. Some examples of these required documents are proof of identification, social security number, EIN number, business license, incorporation documents, corporate ownership certificates, and/or fictitious business name statements.
The application process for a business loan can be strenuous and lengthy. Due to the policies of lenders, they may require many documents to get a clear picture of your personal and business financial history. Being prepared for what to expect will help you avoid the stress of last-minute delays by having the required documents in hand.