The information and documentation you’ll need for the application depend on the business lender. Traditional business lenders like banks typically require a great deal of paperwork, whereas most online business lenders require just a few documents at best.
Here’s every document and piece of information you may need to apply for a business loan:
1. Loan Amount
Your desired borrowing amount will determine if you should apply to a traditional or non-traditional business lender. Banks prefer to issue business loans in the six and seven-figure range. If you’re not looking for more than $250,000, a bank probably won’t be too interested. Online business lenders, on the other hand, specialize in smaller loans.
It’s also important to know your exact borrowing amount so you can avoid the dangers of asking for too much or too little. Though every expense naturally creates additional costs, you shouldn’t ask for more money than you can afford to pay back.
2. Loan Purpose
With traditional business lenders, your intended purpose of the funds may play a massive role in your approval. These lenders heavily favor companies that use the borrowed funds to increase revenue dramatically. If you plan to use the funds for another purpose, you should probably pursue an online business lender.
Many online business lenders won’t even ask you to disclose the purpose of the funds. However, revealing this information will help them figure out the best repayment structure and terms for your needs. The use of the funds has a direct impact on how long it will take you to pay off the debt.
3. Personal Credit Score
This is undoubtedly the most critical requirement for a bank loan. If you don’t have excellent credit, banks won’t even bother looking at the rest of your data. The only way to access a bank loan with subpar credit is with collateral, which we’ll explain in just a bit.
Though online business lenders frequently work with borrowers with poor credit, your credit score still plays a role in your interest rate and terms. Thus, you should do anything you can to raise your personal credit score before applying for any sort of business loan. However, borrowers with subpar credit may be able to access reasonably favorable rates and terms from online business lenders with outstanding cash flow.
4. Business Credit Score
Your business credit score reflects your business’s creditworthiness. The primary criteria are your business’s payment history, length of credit history, the size of your business, and risk factors in your industry. Three major agencies track and score business credit: Dun & Bradstreet (D&B), Equifax, and Experian. D&B and Experian use a 0 to 100 scoring scale, while Equifax supplies three different scores, each with a varied range. There is one more score called the FICO Small Business Scoring System (SBSS), which has a scale of 0 to 300.
The FICO SBSS is the score that most business lenders look at because it’s based on a combination of the scores supplied by the three agencies mentioned above, along with the business owner’s personal credit score and business financials. While some business lenders won’t even check your business credit score, others might give it the same significance as your personal credit score. For this reason, you should check if your desired business lender considers your business credit score before applying.
5. Time in Business
Many banks will not lend to businesses that are under two years old. Most online business lenders, on the other hand, will lend to companies that haven’t even been operating for over one year. But much like credit score, older companies are more likely to receive advantageous borrowing amounts, rates, and terms, regardless of where the loan comes from.
Banks tend to favor industries with high potential for growth or industries they’ve worked with before. Specific sectors are known for turbulent cash flow, extreme seasonality, or unpredictable demand. If your industry fits these criteria, getting a bank loan may prove excessively tricky.
Online business lenders are less likely to discriminate based on industry alone. They regularly work with businesses that are highly prone to cash flow issues. However, certain online business lenders might have policies that restrict them from working with certain industries. One example is auto dealerships, which many online business lenders won’t work with. So, before choosing a business lender, make sure they work with your industry.
7. Entity Type
There are four primary business structures: sole proprietorship, partnership, limited liability company (LLC), or corporation (C-Corp). Some business lenders will not work with sole proprietorships. Most are more comfortable working with LLCs or corporations because they have more legal protection and are less likely to implode if the owner faces a lawsuit or a financial setback. If you do have an LLC or corporation, you may need to provide documentation to prove that you are registered in your state.
8. Annual Business Revenue
Every business lender has its minimum for annual revenue. Though some lenders have smaller thresholds than others, they all want to see that your revenue has either remained stable or is on an upward trajectory. Business lenders might also want to know your average monthly revenue, or how much your revenue has grown since last year. You should make sure you know this information very well before applying.
9. Employer Identification Number (EIN)
An EIN is like a social security number for a business. Not all companies require an EIN, but if you have one, it needs to be on your loan application. Businesses that require an EIN include corporations, multi-member LLCs, LLCs that are taxed as a partnership or corporation, and any company with employees. If your business does not belong to any of these groups, you can simply enter your social security number on your application instead of an EIN.
All businesses can obtain an EIN, regardless of their structure. Since getting an EIN denotes a separation between personal and business finances, business lenders may favor companies with EINs.
10. Business Plan
Traditional products like Business Term Loans and SBA Loans may require business plans. A business plan is at minimum a 12 to 15-page document that includes an executive summary, market analysis, financial projections, marketing strategy, and of course, an explanation of how you plan to use the borrowed funds and how it will increase your revenue and profitability.
As you can see, business plans take a lot of time to compose and may turn out to be the most tedious part of the entire application process. Many business owners probably choose to pursue online lenders solely because business plans usually aren’t required.
11. Business Debt Schedule
Most traditional business lenders and some online business lenders require Business Debt Schedules. The debt schedule highlights all outstanding debt, monthly payments, and payment dates. Business lenders will use this information to calculate a business’s debt service coverage ratio (DSCR). DSCR is the ratio between current debt and interest payments and current incoming cash flow. Lenders often decline applications primarily because the applicant’s DSCR is too low.
12. Balance Sheet
This is an outline of the businesses’ assets, liabilities, and stockholders’ equity. In other words, a Balance Sheet shows what your business has (assets) and what it owes (liabilities). A strong Balance Sheet denotes that liabilities + stockholder’s equity is equal to the combined value of current and fixed assets. All business lenders require balance sheets since they are one of three elements of a Financial Statement. The other two components are your Profit and Loss Statement and Cash Flow Statement.
13. Profit and Loss Statement
Also known as an Income Statement, a Profit and Loss Statement contains an overview of revenues, expenses, net income, and earnings per share. This allows you to project sales and operating expenses. All business lenders require Profit and Loss statements.
14. Cash Flow Statement
This is broken down into three sections: Operating activities, investing activities, and financing activities. Operating activities involve cash flows from sales and day-to-day operations, and investing activities involve the buying and selling of assets. Financing activities include cash-flow related to debt and equity. The statement’s primary purpose is to reveal how much money is coming in and out of your business.
15. Accounts Receivable Aging and Accounts Payable Aging Reports
Some business lenders (mainly banks) will ask for current accounts receivable (A/P) and accounts payable (A/P) aging reports. These documents show how competent your business is at receiving payments for goods/services and paying your bills. The A/R report details the number of invoices you’ve sent to overdue clients and how long these accounts have been late. If you have too many accounts on this report, it suggests you may not be as effective as you should be in collecting payments. Your A/P report shows just the opposite; it highlights the number of invoices your company hasn’t paid. Ideally, you should have only a few (or zero) outstanding/overdue accounts.
16. Credit Card Processing Statement
This is a summary of your business’s monthly credit card transactions. It is only necessary if you are applying for a Merchant Cash Advance, which requires these statements from the three most recent months.
17. Business Licenses and Permits
Depending on your industry and your home state, some business lenders may ask to see the documentation that proves that you are legally permitted to operate your business.
18. Proof of Collateral
Many banks require collateral for all loans. Though most online business lenders don’t require collateral, providing it may offset issues with credit score, cash flow, or time in business. Collateral gives the lender something to sell should you default on your loan. Thus, providing collateral decreases the lender’s risk of losing money.
Popular examples of collateral include real estate, equipment, vehicles, and inventory. It’s important to note that the value of your collateral won’t automatically allow you to borrow the same amount of money. Business lenders usually discount the value because they aren’t 100% sure they’ll be able to sell it for the same price later on. For example, if you provide $10,000 worth of collateral, it may only help you access a $6,000 loan.
19. Bank Statements
All business lenders require bank statements because they reflect your capacity to make payments. Your bank balance shows how much cash you have available to make payments after covering operational expenses. Business lenders will likely use your most recent statements to calculate your average bank balance. While online business lenders usually ask for the past three or four months’ worth of statements, traditional business lenders might ask for at least six months since their loans carry longer terms.
20. Personal and Business Tax Returns
Most banks will require two years of personal tax returns. This information is particularly crucial for sole proprietorships, partnerships, or S-corporations, as these entities report business profits and losses on their personal tax returns. If your business is a corporation or an LLC that is taxed as a corporation, the bank might require two years of business tax returns as well.
21. Copy of Your Commercial Lease
If you have a brick and mortar business, you may need to include a copy of your lease with your business loan application. Lenders want to see that your business will be able to use the leased property for the entire term of the lease, no matter what happens to the landlord.
22. Ownership and Affiliations
Applying for a business loan when there are multiple owners can get a little complicated. Traditional business lenders usually require contact information for every owner. They’ll also ask for any affiliations you may have with other businesses, like serving as a board member or consultant. This information exposes any potential conflicts of interest. If you’re applying for an SBA loan, you may need to provide personal financial information of anyone who owns 20 percent or more of the company. Each owner will also have to give a personal guarantee.
23. Legal Contracts and Agreements
Depending on the business loan purpose and type of business, lenders may ask for some of the following:
- Contracts with major suppliers or other third parties
- Corporate bylaws
- LLC operating agreement
- Franchise agreement
- Commercial real estate purchase agreement or equipment purchase agreement