When getting a business loan, lenders will have various requirements that you should keep in mind when preparing to apply for financing. This can include items such as a business plan, tax returns, bank statements, time in business, and collateral. They are reviewed when determining loan details and can influence factors such as interest rate, loan amount, and repayment terms. By understanding and preparing those requirements beforehand, you can help streamline the application process and better determine your loan options.
1. Business plan
A business plan outlines how you plan to utilize loan funds for business purposes and the key characteristics of your business, including structure, industry, location, and services or products offered. It also includes the timeline of your operations and your growth plans.
This can be used to demonstrate to the lender why you need financing, why you’re a good fit as a borrower, and how you plan to repay the loan. The stronger your proposal, the more likely the lender will be confident in issuing financing.
Some essential elements of your business plan should include:
Some essential elements of your business plan should include:
- Company description
- Company size and structure
- Growth projections
- Industry and market analysis
- Management and operations
- Products or services descriptions
- Sales information
- Marketing plans
Tip: While a business plan won’t be a requirement of all lenders, it’s good to have on hand, especially if you’re a startup or planning on applying for a Small Business Administration (SBA) loan.
2. Financial statements
A lender commonly requests financial statements to better determine your business’s financial position. These can include profit and loss statements, balance sheets, and income or cash flow statements. These documents represent how your business has managed its finances historically, and they can allow the lender to determine whether your operations fuel enough cash flow to afford any further debt obligations.
3. Tax returns
Both business and personal tax returns will likely be requested by the lender. This is to ensure that you have sufficient repayment capabilities. Tax returns verify income and debt-to-income ratios and are another tool that the lender can use to review your creditworthiness and the overall financial position of your business.
4. Proof of ownership
You’ll also want to provide items that demonstrate ownership and legal operations. Specifications can differ based on your location, as different states, cities, and counties may have varying requirements in regard to business activities.
Generally, proof of ownership has to do with the following common items:
- EIN
- Professional licenses or certifications
- Corporate bylaws
- Franchise agreements
- Partnership agreements
- LLC
operating agreement - Articles of incorporation
5. Bank statements
A business bank statement is a document that a lender can use to consider your business’s financial history. It allows them to view your bank account activity and provides a comprehensive view of the management of your finances. Essentially, lenders want to ensure that you can maintain cash flow and operations before they decide to issue funding.
6. Business debt schedule
Before entering into further debt, lenders will factor in your existing debt obligations. This is to ensure you’re not biting off more than you can chew in terms of debt repayments.
Tip: Your budget is an important factor when applying for financing, so review your debt schedule to help you plan accordingly when determining just how much you should request in financing.
7. Revenue and profitability
Lenders will want to see your history of revenue and profitability to ensure that your business’s cash flow is steady and that you’re able to meet any debt obligations. Specific revenue requirements can vary based on the loan type and lender; however, strong profits may also allow you to receive more favorable rates and terms.
Lenders commonly use the debt service coverage ratio (DSCR) to compare operating income with current debt obligations. It’s calculated by dividing annual operating income by total annual debt payments owed. Generally, lenders want to see a DSCR of 1.25x and above.
8. Time in business
While not always the case, startups or other early-stage companies can be considered more of a risk when issuing funds. So, generally, lenders prefer working with businesses that have been operating for at least two years, although some will work with as little as six months. If you’re seeking startup funding, you may need to find lenders that are even more flexible or that specialize in that area.
9. Credit scores
Both personal and business credit scores will likely be taken into account by a lender. Generally, you need good credit from both sides to qualify for financing. That said, minimum credit score requirements will vary per lender, with some being more flexible than others.
With traditional bank or SBA loans, it’s common that you’ll need excellent credit to qualify. You may have more luck with credit unions or online lenders if your credit score is less than ideal.
Credit scores are important, as they represent your ability to manage your debts and repay them promptly. Keeping your credit in mind when applying for financing can help you choose the right loan type and lender based on your qualifications.
You can get a business credit report via the following:
- Dun & Bradstreet
- Experian
- Equifax
- Transunion
- FICO
10. Collateral
Loans can typically be either secured or unsecured. Collateral requirements will differ depending on which loan type you choose, so it’s worth considering what you may have to offer as collateral. Common types include equipment, property, cash, investments, inventory, and invoices.
Essentially, lenders want to use collateral to mitigate risk in the event of default, as having a form of collateral tied to the loan allows them to recoup their financial losses if necessary. You may also be presented with the request for a personal guarantee. This is common with unsecured loans that don’t have physical collateral to back the loan.
11. Industry and location
Some business industries are more difficult to finance than others. In fact, some lenders may not finance certain industries at all if they pose too much risk. Lenders may also consider market conditions when determining which industries may have the best odds of success in terms of revenue and growth.
Other considerations include the products or services offered by a business and the legality of issuing financing at the state or federal level based on the business’s location. For example, cannabis products are ineligible for financing by many lenders, as loans insured by the federal government prohibit them. This likely means SBA loans are also out of the question if you operate within any prohibited industries, as they are federally insured.
Common challenges and mistakes to avoid
There are a few common challenges and potential mistakes when getting a business loan. To avoid any speed bumps in the lending process, consider the following:
❌ Lacking communication with your lender: A lender may request further information or documentation throughout the application, approval, or underwriting process. It’s important you respond promptly so that it doesn’t halt the process or prompt them to withdraw your application.
❌ Providing incomplete or illegible documents: You may be subject to delays within the lending process if you don’t double-check that all fields, dates, and signatures are correctly filled out before submitting any documents. It’s also essential that the information provided in these documents is legible so that the lender can review them quickly.
❌ Not updating elements of your business: A lender will look for stable cash flow and operations when considering you for financing. If you make any major updates to your business — whether it be structure, operations, or anything that directly impacts your profitability — they may influence the lender’s decision to provide you with funding.
❌ Providing too many materials: Keep the process efficient by only providing what’s requested by the lender. You don’t want to cause any delays by giving them too many documents to wade through in the review process.
❌ Forgetting to ensure your documents are current: You’ll want to ensure that the documents you provide are, in fact, in good standing and applicable. If they’re outdated, it could slow down the process or even cause the lender to reject your financing request.
How to improve your chances of approval
Getting approved for a business loan can vary based on various factors. Lenders evaluate numerous aspects of a financing request to mitigate risk and ensure a return. By understanding how lenders review these items, you can increase your odds of approval and even get better rates and terms.
Frequently asked questions (FAQs)
Most importantly, be sure to work closely with your lender if you have questions about the lending process. This includes term and fee structures, available loan programs, and understanding business loan qualifications.
How do you qualify for a business loan?
Business lending criteria will vary based on the loan type and lender. Certain lenders have stricter requirements than others, and loan types can have differing collateral requirements, repayment terms, and maximum loan amounts. Some of the most common factors considered when getting a business loan include credit score, time in business, and annual revenue.
Is a business loan hard to get?
It depends on your creditworthiness as a borrower and the type of financing you’re trying to get. You may have more difficulty getting a business loan if you have less than ideal credit or limited resources.
What proof do you need for a business loan?
Often, you’ll need to provide various documentation demonstrating the legal structure, financial position, and need for funding. Lenders will request proof of information based on the type of loan you seek and their specific qualification criteria.
