Article Summary: Are you prepared for your business loan application? In addition to the documents you'll need to apply for a small business loan, there are some other things you'll want to do before you start looking for a loan.
The more information you have at your fingertips, like your P&L, an overview of your expenses, and your annual revenues, the better you'll be able to discuss your business' financial health with a potential lender. Although the document requirements will vary from lender to lender, keep reading to learn more about some of the common documents and other things you'll want to do to prepare for a small business loan.
In addition to the local bank, there are more options available today than ever before for small business owners who need to borrow extra capital to fuel growth or fund other business initiatives. What lenders require regarding creditworthiness, age of business, revenues, and documentation varies, but there is some basic information you’ll want to have at your fingertips whenever you apply for a loan.
Although I don’t think most lenders expect a business owner to be an expert in small business financing, they will want to know that you have an understanding of your businesses financial position. I once spoke with a lender who said, “If I can tell more from a business’ financial documents than the business owner, I most likely will not approve their loan application.” With that in mind, let’s start with a few of the questions most lenders need to answer:
What Lenders Want to Know
Most lenders are trying to answer a few fundamental questions:
- Can your business repay a loan? Is your business in a position to service debt? Do you have the revenue and cash flow to make periodic payments? This is why lenders ask questions about your revenue and cash flow. Many lenders will also want access to the previous three months of your bank statement to verify that you have the cash flow to make the periodic payments.
- Will your business repay a loan? What does your business credit profile and personal credit score look like? How long has your business been doing business? Lenders use this data, for example, to look at your track record. If your business can demonstrate a good history of servicing debt in the past, lenders see that as evidence that you will be more likely to do the same in the future.
- What will your business do should something unexpected happen? If you are borrowing to fuel some kind of growth strategy or profit initiative, for example, will you still be able to make the periodic payments regardless of the outcome of those initiatives? This is one reason why traditional lenders like the bank, including SBA-guaranteed loans, will require specific assets be identified as collateral. They want to make sure they will be protected should something unexpected happen.
Documents Often Needed to Apply for a Business Loan
Although every lender is different and could require different things, the following list is a good place to start. Regardless of whether or not the lender you’re applying with requires these documents, understanding what the documents are telling you is important information every business owner should be familiar with:
- Your business financial statement, including a profit and loss (P&L), an income statement, and an outline of your expenses
- Your personal financial information, including the last three years of your personal income tax return
- Your business license
- A copy of your business lease
- Your business bank statements for the last three months
For most small business owners, personal credit history will be factored into any creditworthiness decisions. What’s more, traditional lenders like the bank or a credit union will likely require some kind of specifically identified asset to be used as collateral. Many online lenders won’t require specific assets to be identified as collateral, but they will likely assess a general lien on business assets and require a personal guarantee to secure the loan.
Are You Prepared for Your Business Loan Application
In addition to the documents you’ll need, there are a few fundamental things you’ll want to make sure are in place before you apply:
- If you don’t have a business credit track record, start building your business credit by creating trade credit relationships with your suppliers or applying for a business credit card. It may not be a small business loan, but it will help you build a strong business credit foundation; provided your suppliers report to the appropriate business credit bureaus.
- Because your personal credit score will be part of the creditworthiness discussion for most small business owners, it’s important to be aware of your current score and work to improve a less-than-perfect score. For example, a personal credit score below 600 will make it difficult to qualify for a business loan. If there are issues, start taking actions that will help you improve your personal credit score.
- Make sure your business identity is in order. You’ll need a business tax I.D. number as well as a separate business banking account (this is true even for sole proprietorships). A business phone, address, and even a website will help.
Once you’re ready to apply, make sure you can clearly articulate your reason for borrowing (your loan purpose). Of course being prepared is no guarantee that your loan application will be approved, but it will likely increase the number of options you have available.
You can read more about what OnDeck is looking for HERE.