Getting a small business loan is a daunting task for many company owners, simply because it can be time-consuming to gather all the documents needed to apply. If you’re looking to secure any type of financing to increase capital, having a checklist of the most common requirements will go a long way in expediting the application process.
Before diving right in, take note that lenders consider a number of factors when requesting documents. The requirements may vary based on time in business, your industry, credit score, and the type of loan you’re trying to get.
For example, applying for a business line of credit won’t necessarily require you to have a good credit score, although having solid financials will mean you’ll get lower interest rates.
On top of that, traditional lenders like banks and credit unions are stricter when approving loan applications and may require more documents to prove your creditworthiness. Alternative lenders, on the other hand, are much more lenient.
The business loan documents listed below are the most common requirements borrowers must submit to the lender they will be working with. If any of these documents are not submitted (or for some reason the information you provided is incorrect), your application may be at a higher risk of getting rejected.
Business Loan Application Requirements
Income tax returns
Lenders require your most recent Income Tax Return (ITR) because it illustrates how well your business performed in the previous year. It verifies your income, and uses the information on your ITR to determine the amount of money they could loan you.
Also, your ITR shows your debt-to-income ratio, which is the percentage of your monthly gross income used for paying off debts. If your debt-to-income ratio is high, lenders might consider you a high-risk borrower.
To give you an idea, your debt-to-income ratio must be below 43%. You can calculate yours by dividing your monthly debt by your gross income. For example, if your monthly debt is $15,000 and your gross income is $55,000, your debt-to-income ratio is 27% ($15,000 / $55,000).
Financial statements are a critical barometer of your business’ success. They give lenders an overview of your organization’s financial position and cash flow.
Like your ITR, financial statements are used by lenders to determine if your business is keeping up with expenses, what your income sources are, and whether you are generating enough money to take on another debt.
There are three key financial statements you need to prepare beforehand: your balance sheet, profit and loss statement (or your income statement), and cash flow statement.
- Balance sheet – gives you a general overview of your assets, liabilities, and stockholders’ equity
- Profit and loss statement – gives you an overview of your company’s revenues and expenses. Your P&L statement will also show your net income at a certain period of time.
- Cash flow statement – shows the inflow and outflow of cash in your business. This demonstrates whether the company is making enough money to pay its creditors, has enough cash reserves, and how much goes to operational expenses.
Lenders use all these financial statements to evaluate your business’ financial health, as well as income potential. It is also used to check which assets may be used as collateral when applying for a business loan.
Proof of business registration
To prove your business’ legitimacy, you need to provide legal documents such as business registration, licenses, permits, articles of incorporation, copies of contracts with third parties, franchise agreements, and other documents that prove you are operating your business in good faith.
In some instances, borrowers show their commercial lease agreements, payroll documentation, and certificate of good standing. This certificate indicates that the company is up-to-date with state-required filings and taxes, giving lenders a better idea of where your business stands.
Good personal and business credit
When applying for small business loans, you need to know both your personal and business credit scores. You can obtain copies of your credit reports from TransUnion, Experian or Equifax so you have an idea of your credit standing.
To give you an idea, personal credit scores range anywhere between 350 to 850; meanwhile, business credit scores are any number below 100. For banks and alternative lenders to trust you, you must have a personal credit score of at least 580. This score shows lenders that you are a good payer.
Here’s an instance: if you are applying for an SBA 7(a) loan, the minimum credit score requirement is 650. If you’re getting an SBA microloan, the minimum credit score is 620, plus collateral. For short-term loans, you may need a minimum of 540. Note that this will all depend on your qualifications, so you need to speak with a finance expert to discuss your options.
If you’re having trouble on this front and think that your credit score isn’t in good shape, you may want to explore financing options from lenders who aren’t strict. No credit check business loans include a business line of credit, invoice factoring, and equipment financing, although you have to put up collateral to minimize the lender’s risks.
Don’t be afraid to ask
Understanding the ins and outs of business financing takes a lot of work. With so many options to choose from, you need to consult a finance expert to know the best funding for your business.
As for the documents, once you’ve prepared these requirements beforehand, you won’t have a problem during the application process. Provide accurate and legitimate information to your lender to secure a loan in no time.
ABOUT THE AUTHOR
Matthew Gillman is a business financing expert with more than a decade of experience in commercial lending. He is the founder and CEO of SMB Compass, a specialty finance company providing education and financing options for business owners.