Common Small Business Loan Requirements
If you are an entrepreneur or small business owner who is ready to take your business to the next level, it may be time to look into acquiring small business loans. After all, to make money, you need money. Fortunately today’s financing landscape features several options when it comes to applying for funding including traditional banks, alternative business loans, and grants.
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It is important to note that each funding provider has its own set of documents required to approve a small business loan or grant. Banks or more traditional lenders are going to require a lot more documentation than alternative lenders. Grant providers probably require the most paperwork and offer the slimmest chance of funding approval. Regardless of what type of lender you select, acquiring funding takes preparation and work. The more paperwork you have available the faster the application process will be and the more likely you will receive the funding you need. To help you speed up the process, here is a comprehensive list of all the types of documents you should have on hand for each type of loan. That way, when it’s time to submit your application, you’ll be all set and ready to go.
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Documents Required for Traditional Bank Loans
Traditional banks may be the first type of lender that pops into your mind when you think about applying for a small business loan. While it’s true that traditional banks are the largest type of small business lenders, it’s also true that it’s much more difficult to secure a traditional bank loan, and the majority of small business applicants get rejected. To get a traditional bank loan you most likely need great credit, healthy financials, collateral, a personal guarantee, and the process can last for months.
If you have time to wait for funding, great credit, and are interested in low, fixed interest rates, then applying for a traditional bank loan may be a good option. Before you even set foot in the bank, here are the documents and relevant information you should have prepared to present to your lender.
1. Personal Identification
It may seem obvious, but you’d be surprised how many business owners forget to bring their personal identification when applying for a loan. To apply for anything you have to prove that you are who you say you are. This means you should have a copy of your personal identification, which may include your driver’s license, passport, and/or birth certificate.
2. Business Licenses and Certificates
Not only do traditional banks want proof of identification, but they want verification that you are operating legally in your state and city. This means you need to show up with a copy of your updated business licenses and any other certificates that you need to legally operate your business.
For example, if you run a restaurant, bring your: business license, food handling and safety permits, building license, liquor license, music license, franchise or trademark license, etc. The government requires different licenses for different types of business owners. Before you show up at the bank, make sure you have updated copies of all relevant licenses. Otherwise, the bank may deny your application.
3. Current Loan Documents
Do you have another type of business loan? If so, the bank is going to want all the details of your loan. Banks will take other loans into consideration when deciding whether or not to offer you funding, so be prepared to disclose this information.
4. Business Leases
Having a copy of required documents on hand includes any business leases. This means if you have any equipment leases or building leases, you need to bring documentation that provides the banks with all necessary information.
5. Personal and Business Taxes
It’s safe to say that all banks want you to bring the last 2-3 years of your income and business taxes. The reason banks want your full tax returns (not just the first few pages) is because it gives them a comprehensive idea of your income, business losses, capital gains, depreciation losses, deductions, and more. When underwriters review this information, they get a better idea of how much they feel comfortable loaning you and whether or not you will be able to make due on your end of the bargain.
6. Business Plan
When applying for a traditional bank loan, it’s also smart to bring a professional business plan. A business plan outlines your vision, business goals, marketing efforts, mission statement, employee needs, and more. Ultimately, it shows your lender the plans you have set forth to achieve your business goals. This helps banks feel more secure about your potential success as a business owner.
7. Work History or Resume
Similarly, it’s important to bring an updated resume. A resume will show your past experience and help banks learn about your past successes and evaluate your potential success in your current business.
8. Personal Credit Reports and FICO Scores
Most banks will just ask for your social security number and permission to pull a credit report for you. This means you don’t have to actually bring a credit report to the bank. However, you may want to gain access to a report beforehand, so you know what to expect in terms of interest rates and whether your credit is good enough to qualify for a traditional bank loan in the first place.
Remember, traditional banks typically only lend to borrowers with great credit, and the better your credit, the lower your interest rate will usually be. If you don’t have excellent credit, then it makes more sense to skip out on the lengthy traditional bank lending process and opt for an alternative lender instead. More specifically, if your FICO or credit score is 700 or above, you can probably secure a traditional bank loan if you have all the other financial requirements. If your FICO score is less than 700, it makes sense to look beyond banks for funding.
9. Financial Records
All lenders, especially banks, will want a copy of your financial records. If you already own and operate a business, make sure you have all of your financial reports from at least the past 2 years on hand. The more information lenders have about your business the easier it is to approve your business for a small business loan. Even if you opt for an alternative lender where there are significantly less documents required for an approval, the clearer the financial picture on your business the better the rates and terms and the larger the funding amount.
10. Income Statements/P&L Statements
Some lenders will specifically require that you include your profit and loss statements when they request financial records. This should include all of your revenue and expenses from the last 2 years, specifically from the last 120 days.
11. Legal Documents and Entity Type
Do you have a partner? Do you have ownership agreements? What type of business entity are you? When applying for a bank loan, make sure to gather all the legal documents that answer all these types of legal questions. It will make the lending process a lot smoother.
12. Ownership and Affiliations
If you have financial interest in any other businesses, then be prepared to disclose that information to your lender. Additionally, if you have any partners that have financial interest in your business, they may need to sign on the loan as well.
13. Landlord Subordination Form
Traditional banks don’t always request this form, but sometimes they do. This is a form from your landlord that assures you will be able to stay on the property for the duration of your lease. Sometimes traditional lenders will require this for brick-and-mortar shops. Most lenders also want to know that you pay your rent on time so be prepared to supply documents regarding your business property.
The application for a traditional bank loan is often complicated and requires a lot of documents. If you plan on going this route, make sure you are prepared with all the right information to avoid any delays as this process can be lengthy already. For small business loans that do not require so much time and paperwork you may want to choose an alternative lender.
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Documents Needed for Alternative Business Loans
There are several reasons why an alternative lender may be a better option when compared to traditional lenders and grant providers. The application process is a lot quicker, there are loose credit requirements, they often offer special lending programs for women, minorities, and underserved groups, and you don’t need to gather nearly as many documents. Alternative lenders also offer a variety of financial products so if you have really good credit but fall just short of traditional lending requirements you can find competitive rates and terms. Another plus is if your FICO score is below 600 alternative lenders offer low doc bad credit business loans.
If you have bad credit, need money more quickly, or don’t want to deal with a lengthy loan application process, then seeking out a small business loan from an alternative lender may be the perfect fit for you. Here is what you need to have ready to apply for alternative funding.
1. Basic Information
Initially, to get a pre-approval an alternative lender will simply want to know your name, business name, number, email address, monthly gross sales, and the amount of money you are requesting. You can quickly enter all this information with an online application, and then a representative will call you to go over your funding options.
2. Bank Statements
The more financial information you can present to a lender, the better. However, most alternative lending companies will be satisfied with at least 4 months of bank statements. They want to know what your income is to determine how much you qualify for, that you’re a good investment, and that you can be a responsible borrower.
3. Average Bank Balance
In addition to bank statements, many alternative lenders will ask for your average bank balance. This will show lenders that you are able to manage a positive cash flow and your financial picture demonstrates a little bit of cushion in case of an emergency.
4. Balance Sheet
Alternative lenders don’t require full financials like a traditional bank, but it will help them if you can offer a balance sheet. A balance sheet will just show lenders how you manage your assets and liabilities. This gives lenders more confidence in your ability to repay them. For most lenders an average bank balance and a couple months of financial information will be enough, but this is a good document to have if you are seeking a larger funding amount for a longer period of time.
5. Time in Business
You don’t necessarily need official documentation to prove how long you’ve been in business, but most alternative lenders will want to know how long you have been operating. The longer you have been in business, the more likely you are to get a loan. However, most alternative lenders only require you to be in business for a few months to be eligible for a loan.
That’s all you need to get started with a loan from an alternative lender and the application process is much quicker than a traditional bank, usually a few days to a week or two.
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Documents You May Need When Applying for a Grant
The last of the most common types of funding for small businesses are grants. Grants are notoriously difficult to come by and require a ton of paperwork, but if you have an organization that meets the eligibility requirements it can be a great source of funding. Most grants, whether federally funded or private will include the grant information materials as well as instructions for your application that you can download. It is a good decision to read through the grant proposal instructions before doing the legwork to get the documents in place as each organization has different requirements. Although the documents you need in order to apply for a grant will vary depending on the organization offering the grant, here are some common documents that many organizations will ask for from you.
1. Grant Proposal and Cover Letter
Often required is your grant proposal’s cover letter. Each grant has different requirements for the overall proposal which can be an extensive set of documents, but a cover letter is commonly required and can be a powerful introduction. Some of the basic details included in a cover letter are information about your organization, how you project aligns with the overall mission of the grant provider and how you plan to use the funding, and how your project will improve the community. Here is a sample grant proposal and cover letter.
2. Business Plan
When applying for a grant, one of the most important documents to have in order is your business plan. Organizations that offer grants want to make sure the money they are giving to you is going to good use, and that you have a solid plan for putting the money to work. Before you apply for a grant, go through your business plan with a fine toothed comb and make sure it is both clear and viable. Although it can be a long process developing your business plan, it is never a bad idea to have a well thought out business plan no matter what stage you are at in the business growth process.
3. Proof of Status
Most organizations offer exclusive grants for women, minorities, and/or non-profit organizations. To be eligible for the grant, you’ll need to pull documents together that prove your business entity is a non-profit, minority owned, or has the organizational structure or certification that meets the eligibility requirements for a particular grant.
There are several different types of business grants available and it is important to note that each one has its own individual document requirements. However, a good rule of thumb when starting the paperwork process is to gather your general business ownership information, a grant cover letter, a business plan, and any proof of certifications if available. If you have this information on hand, you’ll be a step ahead in the application process.
When it comes to getting funding for your business, you have several options that include traditional funding, alternative funding, and grants. All of these business financing options have different document requirements although there is some overlap. The best thing to do is try to gather as many of the above mentioned documents that are readily available and then inquire with possible funding sources to learn about their individual document requirements. It is a safe bet that you will need some or all of the above mentioned documents throughout the loan application process. The more prepared applicant you are the more likely you are going to receive the funding you require.