When applying for a business loan, you will find many requirements and qualifications to meet. It can be challenging to keep up with all of the different paperwork and documentation needed. That’s why we’ve created this handy list of the most common documents required by banks and lenders:
What is a business loan, and why is it essential for small business owners?
What is a business loan, and why is it essential for small business owners? Business loans can be used to help get your new or existing company off the ground, buy more equipment, expand operations, renovate facilities, etc.
The types of loans offered depend mainly on the lender — some specialize in invoice financing, merchant cash advances, or term loans, while others provide various options.
Some small business owners wait over six months for a decision. Due to this long wait time, you have to know your funding requirements well before you plan to use the money. SBA Loan Requirements Loans backed by the Small Business Administration requires much of the same documentation as bank loans. Your business must also conform to the SBA’s qualifications.
Personal Documents
Personal Information: This is generally your full name, date of birth, and address. You will need to provide this information on the application.
Proof of Residence:
This document must show that you currently live at the property provided in your personal documents section above (full legal name). It’s usually something like a mortgage statement or utility bill dated within 60 days. If you don’t have either one of these forms, there are other options listed below:
Driver’s License/Passport/Government Issued ID:
These types of identification can also be used as proof of residence if they contain both your current address and photo id. Please note that not all banks accept driver licenses for evidence; it varies by the lender before applying.
Credit Score and History
Credit History Requirements- Your personal credit score and history play a significant role in your approval for a business loan. Generally, the better credit score you have and a more detailed account on file with financial institutions, lenders, etc., will increase your chances of being approved as well as receiving lower rates and fees.
On average financial institutions will need three forms of proof for each tradeline (line items) listed within your personal information section above:
a) A letter from the creditor indicating their reporting period – this can be handwritten by them so long as they provide contact info along with confirmation they reported to credit bureaus.
b) A copy of the statement showing the balances owed as well as a signed and dated document from them that states you are up to date with payments.
c) Copy of both sides (front and back)
Copy of both sides of your most current credit report along with one previous lender’s trade line item letter if there is no verifiable payment history within at least 18 months time frame OR two years duration for revolving accounts like Credit Cards or Lines of Credits.
Profit & Loss Statements for the last three years
Cash Flow Statement:
A Cash Flow Statement is a document that shows the flow of cash in and out of your business for at least three years. This can be provided as an Excel doc, pdf, or prepared by a CPA (a list you will need to provide). Annual revenue and profits are among the most common small business loan requirements across different lenders.
Bank Statements:
You’ll also want to bring any bank statements from the last 12 months – if they don’t have this on file, make sure you get them ahead of time, so they’re ready when it comes time to discuss financing options with the lender.
Income Documents:
A lender needs proof that there’s enough money coming into your company before approving a loan request. In addition to showing income earned over two years via Profit & Loss Statements, lenders may ask for the last two years of W-Tax returns.
Liabilities & Assets:
The lender will also want to know if you have any outstanding debts or other obligations that might affect your ability to repay the loan.
Before applying, they need to review these documents to understand all potential obstacles when discussing financing options with you.
This document provides a list/summary of all liabilities and assets owned by the business owner(s), including personal guarantees on loans, mortgages, etc., and balance sheet figures (Current Status).
This statement must include an inventory of each item listed below at its current market value showing total equity in ownership interests, along with the purchase price paid for items acquired less than 12 months.
Personal Financial Statement (PFS), including current balance sheet and income statement from all sources
Balance sheet:
A balance sheet is a snapshot of your overall financial situation. It shows what you own (your assets) and how much it’s worth, and what you owe (liabilities) or the amount of debt you have.
Income Statement:
An income statement represents all revenue brought into your business over a specific period – typically one year. An accountant on past tax returns can prepare this, but again make sure they send them to the lender ahead of time, so their staff will also review them before seeing you in person for financing options discussion & approval!
A PFS should also include proof of retirement accounts, if any are held at another bank/investment firm, besides checking account details for liquidity requirements.
Financial statements
The number of statements will vary depending on the bank you’re applying to. Most banks will require a balance sheet, profit and loss statements, cash flow statements, income statements, and other financial projections.
They’ll also sometimes want to see past tax returns and copies of pay stubs so they can verify your information. Generally, online lenders are more easygoing with requirements, whereas banks are far more strict.
Personal Guarantee
The last thing a lender will ask for is proof that you’re personally willing to sign off on the business loan and take responsibility should things go south. This can be as simple as a signed letter from you guaranteeing repayment in the event your company defaults – they usually accept this by email or fax, so long as it includes both parties’ contact info!
Business Licenses and Permits
These documents are critical business loan requirements as they help establish your business ownership. Remember that your lender would like to be sure that they are dealing with the correct person when appraising your loan application.
If your business is involved in an activity regulated by a federal agency, you will require a business license or permit from that agency. State and local agencies also issue licenses and permits, so be sure to check with the appropriate office in your area. Depending on the type of business you have, you may be required to obtain a special license or permit from multiple levels of government.
Proof of Insurance
Lenders will almost always require that you have some form of insurance in place before they approve your loan. The type and amount of insurance needed will vary depending on the lender and the type of business you have. For example, many lenders will require that you carry commercial liability insurance in an amount sufficient to cover the value of any collateral used to secure the loan. If you are a manufacturer, you will likely need to have product liability insurance in place.
Business Plan
A business plan is not always required for a business loan, but it can certainly help your case. A well-written business plan demonstrates that you have thought through the details of your business and shows the lender that you are serious about making your venture a success. It also includes detailed financial information that the lender can evaluate your loan application.
While not all lenders require a business plan, having one in hand never hurts, and it may be just what you need to get approved for financing when other options seem closed off.
In conclusion
These are some of the most common requirements for a business loan. Be sure to check with your lender to see what specific documents they require before applying for financing. Small business loans are a great way to get the funding you need to grow your business, but make sure you are prepared before you apply! EdFed offers Business Solutions programs that will help you get a better chance for approval.
