Small Business Loans Tips
Documents Required to Get Business Loans
When it’s time for an entrepreneur or small business owner to apply for a business loan the daunting list of application requirements may seem confusing. Bank statements, business plans, leases; you may wonder why they need all that information. Particularly since they’ll always obtain a copy of your driver’s license or social security card and pull your credit score.
These aren’t arbitrary requests. Banks and lenders need to verify that you’re a legitimate business, with a legitimate business purpose in applying for the loan. These requirements often come from the laws and regulations that surround the banking industry.
Beyond the requirements of regulatory bodies, lenders also want to make sure you can repay the loan, that your industry is legal, and that lending to you will give them a good return on their investment.
It’s a good idea to gather everything you could need ahead of time to expedite the process. Often banks and traditional lenders will give you a checklist of documents they require in addition to an application. If you submit an incomplete application, their underwriters will automatically reject it. Follow that checklist to a “T.”
If you’re thinking about applying for a business loan, here are all the documents your lender may request. While this is a comprehensive list, not every lender has the same requirements.
Official Docs Required to Get a Business Loan
Official documents are those prepared by another financial institution, a state licensure board or state or federal taxing authority. They’re not easily faked, and a lender can verify the information they contain with one or two phone calls. For this reason, they’re often the core of your application.
Proof of Identity – Whether it’s a driver’s license, a social security card, or proof of legal residency, a lender must verify your identity. The Office of Foreign Assets Control (OFAC) publishes a list of sanctioned countries and individuals to whom U.S. lenders can’t lend. Typically, this is to prevent money laundering and funding terrorism. If caught lending to anyone of these lists, lenders face serious fines up to losing their bank’s charter. Therefore, they’re required to verify that you’re not on that list. As well, these documents allow them to pull your personal credit score.
Every lender, whether it’s a bank or alternative lender, will require proof of identity.
Bank Statements – Lenders commonly request anywhere from the last three months to the last three years of bank statements. Bank statements present a picture of the cash inflows and outflows of your business. From this, lenders can extrapolate your ability to repay loans, cyclical trends, and the overall stability of your business.
The number of statements requested often depends on the amount of money you’re applying for and the length of repayment period. If you’re taking out a loan that will be repaid over a five-year span, it’s valuable for a lender to see how you’ve done over the past five years. Almost always requested by a traditional lender, if your credit score is high enough an alternative lender might not ask to see them even if you are applying for an unsecured business loan with bad credit.
Tax Returns – Revenues don’t always make up deposits into a bank account. Owner’s investments, personal loans, and cash borrowed from friends could be keeping your business afloat. Tax returns break the information on a bank statement into categories that allow a lender to better judge your business’s health.
The forms completed for a tax return depend on your type of business, i.e. if you’re structured as an LCC or S Corp, which is also information a lender needs. If you’ve only been in business a short time, a lender may ask you to provide your personal tax returns, too.
When applying for a loan with a bank or traditional lender, expect to provide your last three year’s tax returns. Alternative lenders don’t always ask for them.
Credit Card Processing Statements – Many businesses heavily rely on credit card payments to receive revenue. A credit card processing statement shows the lag between sliding the credit card and getting paid.
Alternative lenders set up weekly, bi-weekly, or monthly loan payments. It’s of particular importance to them to see how quickly you receive disbursements from your credit card processors as well as the amounts of those deposits, especially if you are applying for a merchant cash advance.
EIN or LLC number – The EIN or LLC number assigned to your business provides information to a lender on how your business is structured. S. Corp’s, sole proprietorships and LLC, each offer different legal protections. The protections that surround your business or your personal assets if you’re pledging them as collateral, impact the safety of funds lent.
A word of advice; if you’re trying to build business credit separate from your personal credit, taking out a small business loan under your EIN or LLC number is an easy way to do it.
It’s not always required, but if you do have an EIN or LLC number banks ask for it as a matter-of-course. Practice varies among alternative lenders.
Business License – Many industries, such as restaurants, hair salons or pet care shops, require licenses to operate. If you’re not in compliance with local licensing regulations you could find your business shutdown unexpectedly, which could in turn impact your revenues and repayment ability. Lenders want to know if you’re operating legally.
This number is searchable on many state commerce websites, or an underwriter can call the state and verify if you’re current on business tax payments. However, unless you’re asking for an extremely large sum of money a lender is unlikely to go to these lengths.
Proof of Ownership – if you’ve provided them with a business license and other documents, it’s less likely that a lender will request proof of ownership of your business. Lenders won’t just ask for proof of ownership of your business, however. If you’re pledging an asset as collateral, whether it’s your residence, a building or other large fixed assets, you’ll need to prove that you have the legal right to pledge that asset.
Proof of Length of Time in Business – If you’ve been in business for ten years, you’re a better risk than a business that’s only had its doors open six months. Demonstrated longevity implies that you’ve been successful at generating revenues and satisfying creditors.
Sometimes a lender asks for an LCC or EIN number because they can look up when it was issued and verify how long you’ve been in business. This information is less relevant for short-term loans.
Leases – Your business could otherwise have excellent financials but if you’re a brick and mortar business and unexpectedly lose your space you could be forced to close down. A commercial lease allows you to remain operating in a building even if it’s sold. If your lease has three years left on it, a lender is reasonably assured that you’ll remain in operation.
If you’re applying for a short-term loan, the lender probably won’t need this information.
Information on Any Other Loans Outstanding – While listed on your credit report, a credit report doesn’t show the loan’s terms. Subordination clauses, repayment schedules, and default penalties all impact your business’s ability to repay another lender.
Plan on sending in copies of the loan documents related to other small business loans and contact information for those lenders. You might have to sign a form authorizing those lenders to release information to the bank where you’re applying. While other loans outstanding don’t automatically disqualify you from obtaining more credit elsewhere, too many loans or loans that are in default will raise red flags.
Short term business lenders might not care as long as your cash flow and financials demonstrate that you can repay their loan, too. More conservative traditional lenders and banks usually err on the side of requesting more information than needed, and will want to see these documents.
Prepared Documents Required
While often prepared by a professional such as an accountant or business planner, whether or not you’ll be required to supply documents in this category depend more heavily upon the loan type, size, and lender. Because they’re not supplied by another institution or agency, and require judgement and estimates in preparation, they will never be enough on their own to obtain a loan but are often required in addition to the documents above. However, your lender could ask for many of the items in the below list.
Financial Statements – Financial statements such as a profit and loss, balance sheet and cashflow statement guide many business and investing decisions.
A balance sheet is a point-in-time list of your business’s assets and liabilities. From it, a lender can calculate ratios which support repayment ability, such as the quick ratio. The quick ratio measures your business’s ability to meet short-term debts with your liquid assets by dividing current assets on your balance sheet by current liabilities.
The profit and loss statement calculates your net income. If your business carries a large amount of fixed assets on its books, a lender might also request a calculation of EBITDA, or earnings before income taxes and depreciation. Depreciation of fixed assets is a non-cash item which can significantly reduce net income in fixed asset heavy industries. Removing it from a calculation of net income gives a lender a clearer picture of how much money you’re really making.
Typically, lenders request comparative financial statements. Comparative financial statements show current year or period information next to last year’s data. Year-over-year information allows lenders to see if you’ve had a big dip in revenue, for example, or if you’ve taken on a lot of debt in the last year.
Banks study these statements carefully to determine repayment ability; alternative lenders request them only for longer-term, larger loans.
Business Plan – A business plan document tells the story of where your business is currently at and where you want to take it. It explains your purpose in seeking to obtain new capital, how you’ll use the capital, and how its use will generate the funds to pay it back.
Below is a list of what a bank or lender may or may not ask you to include in your business plan;
- Description of your business
- Information on company’s owners/founders/management team if relevant
- Products and services that you sell
- Target market analysis
- Differentiating factors compared to competitors
- Financial information on profitability
- Current sales and projected sales
- Marketing and sales plan to reach projected sales
Some banks and lenders have a business plan outline which they’d like you to follow. Depending on your industry or loan size, you may have to provide different information.
Resume and Personal Background – Much less commonly requested, a resume and personal background might be needed if you’re a start-up or extremely new in business. In those instances, banks or lenders are somewhat lending on the basis of your expertise. For start-up funding in significant amounts, the resumes and backgrounds of the senior management team could influence a lending decision and your lender might want this information.
Only needed in specific circumstances and typically with large loan amounts, it’s rare that anyone but a traditional bank or lender would request these.
A/R Aging Statement or General A/R – Business typically take out receivables loans, or obtain accounts receivable financing, if they’ve been having difficulty collecting on past due receivables and need short-term cash to see them through. Because the accounts receivable secure the loan, the lender will ask for a statement of accounts receivable.
It’s also highly probable that they’ll ask for an A/R aging summary. If a significant amount of your receivables are 90 to 180 days past due, the lender may want to delve deeper into the reasons for your collections issues.
These schedules are typically only requested if applying for this specific loan type.
Customer List – If you’re specifically applying for an accounts receivable loan, the lender may request your customer list. They’ll want to determine your customer’s collectability, their payment trends, and have the ability to contact them directly. If one customer makes up a significant portion of your past due receivables, the lender may want to check their credit.
Again, a lender would only request this if you’re taking out account receivable financing.
Other Items You May Need
Below is a list of general forms your small business loan application may also require.
Completed Loan Application – Every bank or lender has their own form. While they’ll all request simple information such as your address and phone number, other requested information may vary.
Often, these applications request information that is redundant with items included in your loan application package. A reason for this is that an application is signed and dated, whereas you don’t certify all pieces of a loan application.
Information on a Co-Signer – Sometimes finding someone to co-sign on your loan is the only way to get access to credit. It is important to note that almost every lender will expect the co-signer to be an owner in the business-I added this line. You’ll need information on your co-signer’s credit history, assets, and possibly their banking information in order to have your loan approved. If you’re a business almost every lender will expect the co-signer to be an owner.
Obviously, there’s a reason that many small business owners find applying for a small business loan to be overwhelming. The application packet may require a lot of information, and it’s a time-consuming process to gather it all.
If need cash in a hurry, the length of time between picking up the phone or applying online and receiving funds will always be faster with an alternative lender.