The Top Business Loan Requirements You Need to Know
20 Business Loan Requirements to Follow to Get the Funding You Need
Are you ready to take your business to the next level but aren’t sure how to secure the capital you need to do so? Taking out a business loan could be the answer to those questions. While it sounds like an ideal fix, there are several business loan requirements that you should be aware of before you apply.
In this resource, you’ll discover what business loans requirements are and how you can tackle them. If you’re new to the process, this post will also save you time and effort by listing the top 20 business loan requirements that are common to most application processes.
Business Loan Requirements, Explained
The business loan process often comes with stricter standards and longer application processes when compared to personal loans. This is due to assumed risk on the part of the lender.
The easiest way to think about business loan requirements is to think of them as eligibility criteria. Whether it’s something simple (such as proving your legal identity), or something complex (like providing a structured business plan), loan requirements illustrate a complete picture of how your business functions.
Why are there set requirements?
Unlike personal loans, business loans often mean greater risk for the lender. There is always a chance that your business could underperform projected profits, or that you’ll face economic difficulties that prevent you from repaying. Having a set of standards protects lenders from issuing risky investments.
Business loan requirements are also in place to learn more about you and your business. Lenders want to conduct business with real people who have tangible business plans. While providing the necessary documentation might seem tedious, these important steps show a lender that you are who you say you are.
Eligibility Criteria for Getting a Business Loan
Since comparing individual lender requirements can be overwhelming, we’ve compiled a helpful list of the top 20 eligibility criteria you’ll need to apply for a new loan. These points are designed to give you a leg up in the process, so that you’ll know what you need to provide and when.
It’s always important to check with your chosen lender or lenders to see what your personal requirements may be. While most basic information applies to any time of loan, requirements such as collateral can vary in different scenarios. It’s also helpful to have a financial or business advisor help you fill in the gaps and overcome hurdles in the application process.
With that in mind, let’s take a closer look at the top 20 business loan requirements that business owners and entrepreneurs should know.
1. Healthy credit score
Credit score is extremely important when applying for any type of loan. When it comes to business loans, lenders will often utilize an owner’s personal credit score. The standard benchmark for this qualification is a score of 650 or higher.
Should you prepare to send in a credit report for your business? If you have one–great! Leveraging a personal credit score in this step is especially helpful for new business owners who may not have established business credit lines.
2. Realistic picture of financial needs
Whether or not a lender asks you for this information specifically, it’s always important to keep in mind. What can you realistically afford to borrow? Having a set plan in place for the money can help answer any unknowns in this category.
Consulting a qualified accountant can be a huge help if you aren’t sure what amount to apply for. A professional advisor can help you land on a realistic number that won’t result in missed or skipped payments down the line.
3. Length of time in business
This requirement has to do with your established track record. And while this particular point may not always work in favor of brand new businesses, it’s a huge boost to established companies looking to grow.
The age of your business illustrates that there is less risk in delivering a loan. If you’ve been in business for a shorter time, you may get approval but pay a higher interest rate up front.
4. Proof of annual revenue
Many lenders have a required minimum revenue total that they want to see before approving any loan. This amount could be anywhere from $50,000 to $150,000 yearly.
If these numbers seem high but you still want to secure a loan, work on revenue-building activities that can change the trajectory of your business. If you’re newly established, how can you increase revenue while at the same time strengthening the core of your business? Doing so could buy you time until you are ready to apply for a substantial business loan.
5. Cash flow and income statements
This requirement is generally described as a Profit and Loss Statement. This information paints a realistic and transparent picture of how your business brings in and spends money. How much money does your business have “left over” after necessary payments are made?
Many businesses want to spot long-term trends, so be prepared to show income and loss statements for the past two years. If you’re not feeling confident in this area, work with a financial planner to trim any excess spending that could represent your business growth in a negative way.
6. Up-to-date business plan
Believe it or not, lenders aren’t just interested in the numbers! In fact, many lenders want to develop a relationship with you and your business. A thorough business plan helps a lender learn more about your company and how you plan to grow.
A required business plan may also include profiles or resumes of top decision makers in your company. These personal introductions allow lenders to see who’s in charge and how an individual’s experience facilitates positive business growth. If your team has a good track record when it comes to financing, this could have a positive effect on your loan process.
7. Options for collateral
Depending on the type of loan, you may need to provide collateral. This is essentially a safeguard in the event that you default on payments or can’t keep up with your loan repayment schedule.
Collateral options generally include liquid assets that can be converted to cash in a pinch. These include options like stocks, vehicles, equipment, or real estate holdings. In certain situations, the collateral for a loan is the item that the loan is used for.
The most important thing to understand about collateral is that it can be seized by your lender. Although landing in this type of situation is unlikely, it’s important to know what is legally permissible under the terms of your loan.
8. Personal and business tax returns
These statements showcase your tax history from both a personal and professional standpoint. It’s recommended that you maintain at least three years of tax returns to share with lenders at any given time.
9. Debt-to-income ratio information
Debt-to-income ratio is found by dividing your total monthly debts by your total monthly income. This generates a percentage that many lenders will consider in the application process. A higher debt-to-income ratio can sometimes equate with higher risk for a lender.
10. Updated identification
While it might sound basic, you will almost certainly be asked to provide a valid state driver’s license or proof of identification. These foundational elements will protect your identity and be used to verify any background information that you submit to a lender.
11. Commercial leases
If you are renting an office space or utilizing any outside equipment, your lender may request copies of these leases. These documents provide further information about your business model. Additionally, they can be helpful if a lender is curious about your monthly expenses.
12. Net operating income
Your net operating income is used by the lender to determine your company’s ability to repay. In general, a healthy net operating income is shown by an income amount that’s at least 1.25 times greater than necessary expenses.
13. Real estate documents
Real estate documents may include appraisals, lease information, or environmental investigation reports. Providing these items might be more critical if you’re applying for an SBA loan (which is backed by the government). Real estate holdings can also serve as collateral in certain types of loan agreements.
14. Loan purpose statements
To minimize risk, many lenders request loan purpose statements. These documents summarize how you, as a business owner, plan to use the money. Loan purpose statements are similar to business plans in that they show intent and strategy.
15. Legally binding agreements
Do you have any contractual obligations that could influence your loan repayment status? Are you part of a franchise? If so, your lender may request copies of these binding agreements to ensure that your loan is compliant and that it is in alignment with your other obligations.
16. Bank statements
Many lenders request copies of your business bank statements for a specific period of time. This provides insight into your accounting practices and cash flow. Bank statements are usually easy to obtain through your bank’s online portal.
17. Personal guarantee
A personal guarantee is a way for the lender to pursue a business owner personally if for some reason the business entity can’t pay back the loan. While this is not true of all lenders, some like the SBA require a personal guarantee signature. Before you sign, make sure you have a clear understanding of how this influences your personal financial future.
18. Industry type
In some cases, a lender is only authorized to distribute loans to certain industries. Industry classifications are made through Standard Industrial Classification (SIC) codes and are used by the government to classify businesses. Industry-specific loans may help you narrow your search for a lender.
19. Proof of ownership
If you have business licenses or articles of incorporation, be prepared to submit these to a lender as part of the application process. These are legal documents that showcase your compliance with local, state, and federal business regulations.
20. Payroll and employee records
In some circumstances, a lender may wish to view in-depth records relating to your payroll process. These documents can shed light on your overall expenses and your hiring practices. Although not required by every lender, be prepared to show your payroll process if your loan is needed for operational costs like labor.
Tips for Increasing Your Chances of Getting a Business Loan
To increase your chances for securing a business loan, take the following ideas into account.
- Run your business with healthy, financially sound practices.
- Keep updated records in a convenient and central location.
- Ensure honest and transparent bookkeeping at all times.
- Have a plan in place for growing your business and paying off debts.
How to Find a Small Business Lender
Most business owners begin their search for a small business lender online. Consulting other business owners for personal recommendations is also a great idea if you’re new to the process. Sites like The Credit Review offer comprehensive lists and comparison charts so that you can easily explore options, even if you’re new to the world of business financing.
Compare Requirements and Terms from Top Business Lenders
While many lenders offer excellent options to business owners, not all lenders are alike. The 5 Best Business Loans Companies of 2020 is a great resource for comparing lenders and loan products. Some of our top picks include:
With these and many more options, you can compare time in business and minimum revenue requirements. You’ll also get a quick glimpse at a lender’s rating with the Better Business Bureau and be able to see where to go to secure a quick quote.
Turn to the Experts
At The Credit Review, our team is committed to helping you explore, compare, and move forward with the right loan option for you and your business. The Small Business Funding Guide is the perfect resource for learning everything you need to know about advancing your goals.
Don’t wait another day to start financing your business goals in 2020 and beyond. Small business financing could be the key to unlocking the next chapter in expanded growth, profits, and innovation.
What are the criteria for getting approved?
The requirements discussed in this article cover the basic approval criteria for business loans. Certain lenders may have specific benchmarks (such as credit score) that they follow more closely than others. Approval depends on your lender’s requirements and your ability to meet them.
What will banks and lenders ask me to provide?
The list in this article is a great place to begin! If you’re equipped with this information, you should be able to anticipate most of the items that a bank or lender will ask you to share with them.
Is it hard to get approved for a business loan?
The answer to this question varies greatly based on your personal situation. Fortunately, if you’re struggling or just starting out, there are many lenders who will work with owners in less than ideal situations. In general, business loans are widely available and many owners get approved.
Can I get a business loan as a first-time owner?
Yes! Your status as a first-time business owner should not influence your approval status. However, your financial wellbeing and length of time in business may come up in the application process.
Do I need to take personal responsibility for the loan?
You will need to provide personal financial information to get approved for the loan, but there are protections in place to prevent you from defaulting on the loan personally. If your company is set up appropriately, business losses will be separate from personal losses. This article does not serve as formal legal advice.
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