Here we’ll break down the most common business loan requirements:
- Credit:
When a small-business owner requests funding, lenders almost always check the owner’s personal credit. So having a good personal credit score is very important. Building great credit for the business itself is also very useful when trying to get a good business loan. - Cash flow and income:
Most lenders will look at the debt-to-income ratio of a business when assessing its risk. The higher a business’s cash flow and income, the better the chances it has of getting a loan. - Current amount of debt:
The other part of the debt-to-income ratio is debt. Businesses and borrowers with too much debt will have difficulty getting new loans. - Age of business:
New businesses often have difficulty getting funding because most lenders only lend to businesses with a track record of at least two years. - Industry:
During the loan approval process, lenders assess the risk of your type of business. Some industries are easier to get loans in than others. - Annual Business Revenue and Profit.
Your business’s annual revenue and profits will also be one of the most common small business loan requirements you see across different lenders. In order to evaluate this information, lenders will ask you to provide your profit and loss statements as part of your application. Typically, lenders will want to see both a year-to-date profit and loss statement, updated within the past 60 days, and statements from the previous two years. This being said, however, the ability to qualify for a loan based on your revenue and profits will likely vary across lenders. Overall, banks will want to see that your business is profitable in order to approve you for financing. Alternative lenders on the other hand, will not often require profitability, but will usually have annual revenue minimums. - Bank Statements.
Another way a lender will evaluate your business’s financials in your loan application will be using your bank statements. Lenders will use your bank statements to determine if you can afford your loan and will be able to pay it back. Bank statements can also give lenders some insight into how well you manage the cash coming into your business. Therefore, at a minimum, lenders will usually ask for three months of business bank statements to support the claims you’re making about your company’s financial history. - Personal and Business Tax Returns.
Personal and business tax returns will be among the small business loan requirements that you can expect to see across many lenders. Just like your personal and business credit scores, lenders will use your tax returns to evaluate the health of your personal and business finances, and therefore, your ability to afford and pay back a business loan. - Loan Purpose.
A typical small business loan requirement will be a statement describing what you plan to use the loan funds for. In this statement, you’ll want to be as specific as possible—generally, lenders allow a variety of loan uses, they want to make sure, however, that the amount of money you’re requesting matches up with the purpose for the loan. - Business Plan.
A business plan or loan proposal won’t always be on the list of the documents required for business loan applications, but it will be for some. For traditional bank loans for example, you’ll likely need to provide a business plan for funding. - Balance Sheet.
In addition to the other financial information we’ve discussed, many lenders will also ask to see your balance sheet as part of their small business loan requirements. Like your profit and loss statement, your balance sheet will help show a lender how your business functions and whether or not your financials are in good standing. Essentially, a lender will want to use your balance sheet to see that you have enough assets to cover your business’s operating expenses and pay back your loan on time and in full. Therefore, you should have your year-to-date balance sheet and the last two years of balance sheets (if you’ve been in business that long) ready to go as part of your application. - Copy of Your Commercial Lease:
If you have a brick and mortar business, a lender might want to see a copy of your lease along with your other commercial loan documents. A commercial lease proves that your business will be able to use the property for as long as the duration of the lease, no matter what happens to the landlord. - Accounts Receivable Aging and Accounts Payable Aging:
Some lenders, particularly banks, will ask for current accounts receivable (A/R) and accounts payable (A/P) aging reports. A/R and A/P aging reports are common business loan requirements because they show a lender how efficient your business is at receiving payment for goods and services and paying bills of its own. - Ownership and Affiliations:
When you’re applying for a business loan, you should be prepared to disclose any ownership that you or your partners have in other businesses as well as any affiliations, such as being a board member or consultant in another business. This information discloses any potential conflicts of interest that the lender may have with issuing the loan and any synergies that your business may have with other companies.