Currently, there are more than a few ways to finance your small business. Take the first step by knowing all your available business funding options to get the best loan for your business. If you made your first step, the next step is getting ready for the loan application process. Before you enter into the loan application process, you need to know some common small business loan requirements.
Here we are going to elaborate 20 of the most common small business loan requirements that you need to consider before applying for one.
- The Amount of Loan
The first thing that you need to consider as well as your lender will ask about is how much amount of money you need to borrow for your small business. Traditional sources such as banks are ideal for larger amounts of loan, usually for 7-digit loans. However, if you are looking for smaller amounts, you need to consider alternative lenders. Alternative lenders are the fastest funding sources for smaller amounts of under $500,000. Because of online application and lending process, they are more convenient and quick funding resource. However alternative lenders do charge high interest rates on short term loans. Therefore, you need to think twice when applying at alternative lenders for small business loan.
- Reason for Loan
Lenders will need to know about the reason for getting a small business loan. And for this you need to be more specific about the loan objective, for instance if you want to invest the borrowed amount in cash flow, you need to mention it to your lender. Additionally, there are some lenders that allow a variety of loan uses, they only want to verify that the loan amount you are requesting matches up with your loan objective.
- Your Personal Credit Score
When applying for a small business loan, lenders will need to see personal credit history of business owners and business credit history as well as some other business related financial information in order to evaluate the possibility that you’ll repay the loan. Your personal credit can play an important role in the approval and rejection of your small business loan application.
- Your Business Credit Score
Your business credit score is a factor that measures your overall business’ creditworthiness. Your business credit score is based on your payment history to your lenders and suppliers. Most of the business owners don’t know about business credit score; however credit agencies might create account for your company.
Not every business lender check business credit. However, business lenders who do check, can pull your credit history throughout the underwriting process. Therefore, it is suggested to improve your business’ credit score before applying for a small business loan.
- How Long You Have Operated
When applying for a small business loan, every lender will ask how long you have operated your business. The longer you have been running a business, the better since it suggests your lender that your business has had long-term success. The minimum time required to be in business is two years. If you are running your business for less than two years, it would be difficult to acquire almost any type of business funding. Alternative lenders often require just one-year history of running a business.
- Business Plan
A business plan won’t always be on the list of business loan requirements, however there are some lenders who need to see a business plan. If you are not specifically asked by your lender to present one, it’s good to prepare one.
Your business plan includes your business’ mission statement, financial objectives, profits, future sales, cash flow, income, owner and management team, your target market, competitors detail, your services/products information, your marketing strategy, financial projections of 3-5 years, executive summary and so on. Usually, small business lenders will need to see your profit and loss statements to track your business sales and revenue.
- Your Industry
Most of the lenders will need you to identify your specific business industry. Your industry can affect your loan eligibility as there are some lenders that have certain industries that they won’t lend to. Most of the time, adult entertainment, gambling, and firearms are considered blacklisted industries and lending to these industries can ruin lender’s reputation.
- Your Business Structure
There are four main business structure types, sole proprietorship, partnership, limited liability company (LLC), or corporation. Some small business lenders will need to know about your business structure. By knowing how your business is structured, they have a better idea about your business insights and how you operate and organize your business. However, it is not an indispensable requirement.
- Business Licenses and Permits
In US, most states require small businesses to get licenses and permits before they can start operating business. The requirements will vary depending on your industry and the state you operate in. However, you can make sure that you include business license on small business loan requirements list. Lenders will consider these documents.
- Employer Identification Number (EIN)
The EIN or employer identity number is similar to a social security number for a business. Your EIN number is used by the IRS in order to track your business tax returns. However, an EIN isn’t a business loan requirement, but having an EIN number is good for you.
Collateral is your personal or business asset, which can be anything ranging from your home to your vehicle or business equipment. There are some lenders in the market who want you to place your collateral as security to borrow from them. They can take away your asset when you fail to pay the loan or default on loan. However the alternative lenders don’t require any collateral, but if you are apply for an SBA loan, you need to provide collateral to your lender in order to secure the funding process.
- Profit And Loss Statements
You lender also want to see profit and loss statements in order to track your business revenues and profit. So, it is an important document that you must have to present to your lender. Normally, lenders will need to see at least last year-to-date profit and loss statements, but it can vary.
- Business Bank Statements
To approve your small business loan request, lenders will need to look at your business financials. In any case, small business lenders need to gauge your ability that you can afford the loan and can pay it back with interest. Due to this reason, business bank statements are a must-have documents. These statements can also give some understanding to your lender about how you are going to manage the cash.
- Balance Sheet
A balance sheet is a portrait of your business’s financial health. It’s a basic requirement for small business loan due to the fact that they show your lender how your business is running and what the status of your business financials are. It also indicates your lender about your current assets and liabilities. Lenders only want to see that you have enough assets to cover your business expenses and you can pay the loan back in a timely manner.
- Tax Return Statements (Personal/Business)
Personal and business tax returns are next requirement on the list. Lenders want to observe a small business owner’s personal financials to approve business loans. Most of the times lender want to see the last two years of personal tax returns. If you are running a business with structures like sole proprietorship, partnership, or S-Corp then it is good to have personal tax return statements.
Business tax return statements are important when you are running a business with corporation or LLC structure. If that is the case, your lender will ask you to provide at least two years of business tax return statements so they can confirm revenue, profits and expenses of your business.
- Copy of Commercial Lease Document (if any)
If you are running a brick and mortar business, you have to attach a copy of your lease along with other loan documents. A commercial lease document proves to your lender that your business will use the property until the term of your lease. Getting kicked off your leased properties is not a good thing for both you and your lender, and the lease gives the lender peace of mind that you can stay in your current place throughout the term of the lease.
- Debt Schedule
By evaluating your business’ debt schedule, lenders will need to know about your previous outstanding loans, debts, and some other loan histories. Lenders are more careful about lending to businesses that already have some other loans. So it is advised to clear all your debts before applying for a new loan.
- A/R and A/P Aging Reports
There are some lenders, in most cases banks, who will ask for current accounts receivable and accounts payable aging reports. The A/R and A/P aging reports demonstrate a lender how proficient your business is at getting payments for services and products and paying bills.
- Ownership & Affiliations
Get ready to reveal any ownership and affiliation that you or your partners have in other businesses, if any, such as being a consultant and member of board in some other business. This reveals any possible conflicts of interest that your lender may have with providing the loan and any collaborations that your business might have with other companies.
If you have more than one owners, applying for a small business loan can be quite difficult. Every lender has his own rules regarding how many owners need to approve a small business loan. SBA evaluates personal financial information of anyone who possess less than 20% of the business and ask other owners to provide personal guarantee on the loan.
- Legal Contracts
On the list of small business loan requirement the final one is legal contracts that your business have. Lenders might ask to see to provide contract with your suppliers, LLC, partnership and franchise agreements, company bylaws, your business’ sales agreements, as well as commercial real estate or equipment lease or purchase agreements.
Providing these contract documents to your lender is really important as these contracts can impact the financial position of your business and might create some sort of legal problems for your business in the future. So providing these can help you to play a fair game with your lender.