Securing a small business loan can be pivotal in realizing your entrepreneurial dreams or expanding your existing business. However, the path to loan approval is often paved with specific requirements that lenders use to evaluate your business’s financial health and ability to repay the borrowed funds. So, what do you need for a small business loan? Here are ten essential requirements:
Business Plan: The Blueprint for Success
At the heart of any successful small business loan application lies a well-crafted business plan. This comprehensive document provides a roadmap for your business and helps lenders understand your mission, goals, products or services, target market, and competitive landscape. It should also include detailed financial projections, demonstrating to lenders that you’ve thoroughly considered the potential success of your venture. A robust business plan not only instills confidence in lenders but also serves as a valuable tool for your business’s strategic planning and growth.
Credit Scores: A Financial Report Card
Your personal and business credit scores play a pivotal role in the loan approval process. Lenders use these scores to assess your creditworthiness and gauge the risk of lending to your business. Personal credit scores may carry more weight for small businesses with limited credit history. The loan amount you can qualify for will depend on your score. Most lenders rely on FICO® Scores and consider a good score between 670 to 739. Maintaining a strong credit history by making timely payments and managing debts is essential. Regularly monitor your credit reports for accuracy and take steps to address any discrepancies.
Financial Statements: Showcasing Fiscal Health
Accurate and up-to-date financial statements are fundamental small business loan requirements. These documents, including profit and loss statements, balance sheets, and cash flow statements, provide a snapshot of your business’s financial health. Lenders analyze these statements to evaluate your business’s profitability, liquidity, and overall fiscal stability.
Prepare financial statements regularly, keeping them current and transparent. This practice not only supports your loan application but also aids in strategic financial decision-making for your business.
Bank Statements: Insights into Cash Flow
Lenders often request several months’ worth of business bank statements to assess your cash flow and transaction history. Positive and consistent cash flow strongly indicates your business’s ability to meet financial obligations and repay the loan. Lenders will also look at your account rating to determine your borrowing capacity for that particular bank. A typical good bank rating reflects an average balance of $10,000 for at least three months. Ensure that your bank statements accurately reflect your business’s financial activities. Address any irregularities or discrepancies to present a clear and trustworthy financial picture to potential lenders.
Tax Returns: Documenting Financial History
Both personal and business tax returns are crucial components of the small business loan application. Lenders use these returns to verify your income, assess your financial stability, and ensure compliance with tax obligations. Ensure that your tax filings are up to date and accurately represent your financial situation. Consistency and transparency in your tax history can bolster your credibility as a borrower.
Legal Documents: Demonstrating Legitimacy
Lenders require various legal documents to verify your business’s legitimacy and compliance with regulations. These may include business licenses, registrations, and any contracts with suppliers or clients. Providing these documents helps assure lenders that your business operates within the bounds of the law. Regularly review and update your legal documentation to reflect any changes in your business’s structure or operations.
Collateral: Securing the Loan
Depending on the loan type, lenders may require collateral to secure the funding. Collateral can take the form of business assets, equipment, real estate, or personal assets. This provides lenders with a level of security in case of loan default. Before pledging collateral, carefully consider the risks involved and ensure you have a clear understanding of the terms and conditions related to collateralized loans.
Debt Schedule: Managing Financial Obligations
A detailed debt schedule is a crucial small business loan requirement. This document provides a comprehensive list of your existing debts, including outstanding loans, credit card balances, and other financial obligations. Lenders use this information to assess your debt-to-income ratio and evaluate your capacity to take on additional debt responsibly. Be transparent about your existing financial commitments and demonstrate a proactive approach to managing your debt.
Personal and Business Information: Putting a Face to the Business
Include personal and business information in your loan application, such as your resume, business experience, and background. This information provides lenders with insights into your qualifications, expertise, and commitment to the success of your business. Craft a compelling narrative that highlights your skills and experience, showcasing your ability to lead and grow your business.
Industry Analysis: Understanding the Landscape
A thorough industry analysis is a valuable addition to your small business loan application. This section should cover trends in your industry, market conditions, and competitive landscape analysis. Providing lenders with a clear understanding of your business environment demonstrates your knowledge and preparedness. Stay informed about industry developments and incorporate relevant data into your analysis to showcase your business’s adaptability and resilience.
While large corporate borrowers tend to attract many bankers’ attention, most banks find their markets are comprised of smaller, privately held firms. There are over 20 million of these smaller firms providing 60% of jobs in America today. Join BankersHub for our webinar on Small Business Lending: Evaluation and Underwriting, Policy and Process. Banking professionals will learn how to balance the cost of acquiring smaller borrowers with generating prudent profitability.
