There have been a lot of changes made in the lending marketplace since the 2007 recession. It used to be that the local bank was the only place a small business owner could go to for a business loan. While banks are still a popular place to go, there are other options now. Alternative lenders have since popped up to fill in the gaps. With the new lenders, banks have more capital to finance their company’s growth. However, some new loan products have different applications and underwriting requirements.
Essential Business Loan Requirements
To figure out exactly what you need to get a business loan, take a look at these nine common requirements that you might need to bring with you.
The first thing you will need to know is how much money you wish to borrow. All lenders have parameters, and this will be the primary deciding factor for them. A bank or lender will spend the same amount of time servicing a $1 million loan as they do a $10,000 loan, so they tend to prefer the former so they can make more money. They are more interested in making large dollar loans.
This might seem a bit obvious, but the lender will want to understand what your plans are for the loan — the more specific, the better. If you’re looking to hire staff with the loan, give your best estimate on how many people you wish to hire. If you want to purchase new equipment, be as specific as possible about the type of equipment.
Personal Credit Score
Your lender will probably ask for your credit history and financial information because they want to know you will pay your loan back. This score might not only determine whether you’re approved, but it may also affect your interest rate if you’re approved.
Business Credit Score
This is a measure of your business’s creditworthiness. This score is based on the history of payments to suppliers and lenders. The size, industry, and revenue can also impact this score.
Time in Business
When applying for a business loan, most vendors will ask you how long you have been in business. The longer, the better. This shows your lender than your business has had long-term success, and they would feel more confident in loaning you money.
Having a business plan or loan proposal will not be a requirement everywhere. However, for traditional term loans and SBA loans, it will be required. Even if you aren’t asked to have one, it’s not a bad idea to have one anyway.
For small businesses, you will often need to identify your industry. This can affect the eligibility because each industry inherently has a certain amount of risk. There are lenders out there that have certain industries to which they will not want to lend money.
Small businesses can be categorized in four ways. This includes a sole proprietorship, partnership, limited liability company (LLC), or a corporation. All you have to do is tell your lender how your business is structured.
Business Licenses and Permits
Your business licenses and permits will act as proof of ownership when it comes to your business. This will be a requirement as it will let the lenders know that they are speaking with the owner.
Things the Bank Will Ask When You Need a Business Loan
For banks and lenders who are giving out a business loan, it is all about reducing risks. They will probably ask about the current insurance policies, including taking out insurance against the death of the founder(s).
Lenders are often giving a business loan to start up small businesses. There is a chance they may fail, so the lenders ask for collateral. This could be hard assets from the company itself or possibly house equity from the owners.
Complete Financial Statements
Lenders who are considering giving you a business loan will want to see your financial statements going back three years. This will include business assets, liabilities, capital, and your profit-and-loss history. The main exception to this rule is those who do not have enough history to report.
If you’re looking for a business loan, you will need to be prepared ahead of time to better your chances of being approved. The easier you can make it on the lender to see you are serious about your business, the more likely you are to receive the funds necessary to run it.