Many business owners find it difficult to obtain a small-business loan, simply because assembling all the required documents can take a lot of time. A checklist of common requirements can help you speed up the application process if you are looking for any type of funding to increase your capital.
Be aware that lenders will consider several factors before requesting any documents. These requirements can vary depending on your business’s age, industry, credit rating, and type of loan.
You don’t need to be a high-credit score in order to apply for a line of business credit, but having solid finances will result in lower interest rates.
Traditional lenders, such as banks and credit unions, are also stricter in approving your loan application and may ask for more documentation to prove that you have good credit. Alternative lenders are more lenient.
Below are the most important documents that borrowers will need to submit to their lender. Your application could be rejected if any of these documents is not provided (or if the information that you provide is incorrect).
Business Loan Application Requirements
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Tax Returns
Your most recent Income Tax return (ITR), which shows how your business performed the previous year, is required by lenders. Your ITR is used to verify your income and determine how much money you can borrow.
Your ITR also shows your debt to income ratio. This is the percentage of gross monthly income that you use for debt repayment. Lenders may consider you to be a high-risk borrower if your debt-to income ratio is high.
For an idea of what you should expect, your debt to income ratio must be lower than 43%. Divide your monthly debt by gross income to calculate your ratio. If your monthly debt was $15,000 and you had a gross income of $55,000, then your debt-toincome ratio would be 27% ($15,000/$55,000. -
Financial statements
Financial statements are an important barometer for your business’s success. These statements give lenders a good overview of the financial situation and cash flow of your business.
Lenders use financial statements, just like your ITR, to determine whether your business can keep up with its expenses, where your income comes from, and if you have enough money to pay off another debt.
You need to prepare three financial statements: your balance, your profit and loss (or income statement) and your cash flow statement.- balance sheet gives you an overview of your assets and liabilities.
- Profit & Loss Statement – provides an overview of the revenues and expenses for your business. The P&L will also include your net income for a given period.
- Cash Flow Statement –shows how much cash is coming in and going out of your business. This shows if the company has enough cash to pay its debts, if it has sufficient reserves and how much is spent on operational expenses.
All these financial statements are used by lenders to assess the financial health of your business and its income potential. This information is used to determine which assets can be used as security when applying for business loans.
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Proof of registration as a business
You will need to show your business legitimacy by providing legal documents, such as business registrations, licenses, permits and articles of incorporation. Also, provide copies of your contracts with third-parties, franchise agreements, or other documents proving that you operate your business in good conscience.
Borrowers may be asked to show their commercial lease agreement, payroll documents, or certificate of good standing. This certificate shows that your company has filed all state-required tax returns and is current with filings. It gives lenders an idea of how well you are doing. -
Credit score for personal and business use
You need to know your business and personal credit scores when applying for a small business loan. TransUnion, Experian and Equifax can provide you with copies of your credit report so that you know your credit status.
For an idea of what credit scores can be, they range from 350 to 850. Business credit scores are anything below 100. You must have at least a 580 personal credit score to be trusted by banks and alternative lenders. This score tells lenders that you’re a responsible borrower.
If you’re applying for a 7(a), loan the minimum score is 650. For an SBA Microloan you need a minimum score of 620 plus collateral. You may require a credit score of at least 540 for short-term loans. This will depend on your qualifications. You should speak to a finance specialist to discuss your options.
You may wish to consider financing options with lenders who don’t have strict credit requirements if you are having difficulty on this front. You can get a no credit check business loan, which includes a line of credit for your business, invoice factoring and equipment financing. However, you will have to provide collateral to reduce the lender’s risk.
Ask questions without fear
It takes time and effort to understand the intricacies of business finance. You need to consult with a finance specialist to determine the best financing for your business.
Once you have prepared the required documents in advance, you will not encounter any problems during the application. Give your lender accurate and genuine information to get a loan quickly.