Business Loan Requirements: What do I need to get a business loan?

What Documents Are Needed to Receive a Business Loan?

One of the best ways a business owner can invest in the financial future of his or her company is to apply for a business loan. Understanding the requirements for a business loan is crucial for any entrepreneur looking to expand. That said, the loan application process is not entirely straightforward, especially if a business owner has never before sought outside funding. The bank provided a detailed list of requirements for a business loan application.Depending on the particular vendor a business owner chooses to work with, there might be a number of documents that are necessary to qualify for a loan. If these documents are not supplied to the lender, or if the information therein is incorrect, a business may be denied funding.

In this article, our California business attorney discusses the six important documents that are typically requested by traditional lenders during the loan application process. A good rule to remember is that the more information a small business owner can provide to a business lender, the more likely it is he or she will be approved for a loan.

Why Is a Credit Report Needed for a Loan?

To get access to capital, a business owner should be able to prove that he or she has a record of paying back loans on time and in full. While having a low credit score will not ruin one’s chances of getting approved for a loan, it will probably encourage online lenders to assign one a higher interest rate or a smaller loan amount, Sometimes, collateral may be required to secure a loan.

The differences between a business owner’s personal and business credit scores depends on the particular structure of the company. Typically, it is advised to create a separate legal entity for one’s business, whether this is a limited liability company, a partnership, or a corporation. This means that things like overdue payments on student loans will not affect one’s ability to get a loan as a business owner.

It is a good idea to get a credit report from a credit bureau such as Dun and Bradstreet. With a good credit score, one is considered an ideal loan recipient, which increases the likelihood of getting approved. Before applying, it’s important to meet all the credit requirements for a business loan to increase approval chances.

Also, a business owner can correct any errors in his or her report before submitting their loan application. If their score is poor because of business credit card debt or other financial problems, then it may be a better idea to try improving one’s score before applying for a loan.

Why Is a Bank Statement Needed for a Loan?

One of the primary requirements for a business loan are bank statements. Normally, a small business lender reviews an applicant’s business bank account statements in the course of the application process. This can help demonstrate the legitimacy of the company as well as prove a business’ future cash flow predictions. Lenders are more likely to give loans to companies they believe are profitable and financially responsible. Because of this, it is important to show financial records reflective of this.

Why Are Tax Returns Needed for a Loan?

To secure funding, businesses must provide tax returns for a business loan. A business’ income tax returns can provide evidence of how the company has performed in the past. If a company is new on the scene, then it may be worthwhile to ask the company accountant to create a projection of what the future year’s tax returns will look like. When filing taxes, it is important to maintain the picture of consistent revenue while maximizing deductions. While writing off a large portion of taxes will allow a business owner to minimize his or her yearly expenses, too many tax deductions can create problems with lenders.

Why Is an Income Statement Needed for a Loan?

An income statement is an assessment of how a company has experienced cash flows in the past. In general, an income statement will be separated into columns of revenues and expenses. Many lenders have strict requirements for a business loan, including minimum annual revenue.

Income statements are particularly helpful for business lenders who want to study how a company has done over the past year. If a business’ expenses exceeded revenues, which happens often with new businesses, almost all lenders will want to take a look at its income statement.

Why Is a Balance Sheet Needed for a Loan?

There are a number of differences between a balance sheet and an income statement. An income statement serves as a historical report, while a balance sheet is a picture of a business’ current financial situation. Many companies struggled to meet the lenders requirements for a business loan.

A balance sheet reflects a company’s financial elements, including the following:

• Current assets
• Liabilities
• Sources of equity
• Accounts receivable

All of these values are important in the eyes of business financing lenders. Basically, the function of a balance sheet is to show what a company currently owns and how much it currently owes. If a business’ liabilities exceed its assets, then it may be more difficult trying to secure a business loan with a low interest rate.

Why Is a Budget and Future Cash Flow Projection Needed for a Loan?

When a lender considers a business for a loan, he or she wants to understand how the business owner plans to use the money, and what his or her plans for the business are. For instance, business owners often use their loan money to do the following:

• Buy real estate
• Pay for inventory
• Expand their businesses
• Invest in new equipment
• Afford payroll

While a business lender will want an owner to be as detailed and specific as possible when describing the plans, there is some wiggle room. After all, budget and future cash flows are only predictions, and circumstances can change. Lenders understand this. Researching various lenders can help find the most favorable requirements for a business loan for your company.

To successfully get a business loan, a business owner will need to create two scenarios. The first of these is how the owner believes the business will perform without any financing. The second scenario should show how the business will do much better with the benefit of financing. This comparison should hopefully prove to a lender that the business owner is a legitimate candidate and can repay the loan.

Finally, it is important to remember that required paperwork may vary on the type of loan one pursues. If a business owner applies for a business line of credit or merchant cash advance, there may be different requirements than a traditional loan. Also, it should be noted that bank loans typically need more paperwork for qualification.

Conclusion

In sum, a business owner must prove to lenders that offering financing to his or her business will be mutually advantageous. Compliance with all the requirements for a business loan significantly speeds up the loan approval process. If a business owner can successfully do this, then he or she may secure a loan with a low interest rate. Therefore, having the above documents in hand is in every business owner’s best interest.