Requirements for Business Loans
Everyone needs growth, and your business is no exception. If you are someone with great ambitions for your business, it is normal for you to plan some expansion projects. You may have numerous projects that you intend to grow your company with. The most common problem when it comes to these projects is funding. It is difficult to get funds for your project if you are a small business.
Many people rely on traditional lenders and the end up being disappointed in the end. These days, accessing such loans is only difficult when you do not know where to look. The online business loan option affords you plenty of loan packages to fund your business. If you want to obtain a loan from online lenders, it is recommended that you know these common requirements to plan your application. Having information will make it easier for you to obtain the loan.
- Credit Score
One of the most critical requirements is the credit score. The credit score determines your creditworthiness. This helps the lender to decide if they can trust you enough to fund your loan. This credit score is built based on payments. Most of the payments that account for the credit score are bill payments, payment lenders, and suppliers. Even though not all lenders check credit score, those who check may check without informing you. The most common credit score used by lenders is the FICO score. This score is calculated based on the following; your credit card debts, the duration of your credits, your payment history, and the type of credit you usually use. Lenders typically check the business credit score since you are obtaining the loan for the business. However, some lenders also check your personal score since they want to know how well you manage your credit.
- Business Plan
Another common requirement is the business plan or proposal. Most lenders ask for a business plan because they will want to see what you intend the use the money for. The business plan should clearly lay out the company’s financials. It should also indicate how your company intends to increase profit and sales. The business plan should also show that the company has enough funds to cover current expenditure and loan payments. The business plan needs to give the lender an assurance that you can repay the loan when the time comes. The business plan should also include company description, management team, description of office space, promotional strategies, strategies to increase sales, and SWOT (Strength, Weakness, Opportunities, and Threats) analysis. A business plan is usually a 30 to 50-page document. The final part of the plan is a summary of the proposal.
Another small business loan requirement is collateral. Collateral is a property the lender can take in place of the money if you are unable to pay the loan. The lender will request for collateral to secure the loan. Collateral can be a house, a machine, or inventory that is worth selling. Fortunately, not all lenders request for collateral. There are unsecured loan options too. With this option, you do not need collateral. However, the interest rate on unsecured loans is high since they are risky and the lender has no backup.
- Bank Statement
Your company’s bank statements are also important when applying for private business loans. The bank statement will give the lenders more information about your financials. Lenders need to know more about your financials before they approve the loan. They need to know if you can pay the loan back. Usually, lenders ask for four months’ bank statement. They will request for the most recent ones. Lenders can determine how your company manages their finances by analyzing your bank statement. The bank can also determine if you can repay the loan by calculating your bank balance.
- Personal and Business Tax Returns
Your personal and business tax returns are also essential when applying for a loan. Lenders usually require that you submit tax returns for at least two years. They should be current ones. Lenders will be able to check your profits and loss statements you reported when you filed your tax.
- Commercial Lease Copy
A copy of the commercial lease is also essential when applying for a business loan. If your company resides in a building that was obtained on a lease, you should provide a copy of the lease. The lender will want to verify the duration of the lease. It is important for the lender to confirm that your company will not be kicked out of the property unexpectedly. When a company faces abrupt eviction, it can negatively impact the business and the lenders dealing with the company.
- Business Debt Schedule
The lender will also need your business debt schedule. It is important for the lender to know the current state of your debts. They will want to see the number of lenders on your list. They will also want to know the total amount you owe other lenders and the payment schedule. The business debt schedule will also help the lender to see if you can afford another loan. Some lenders will not grant loans to businesses that have many loans. They will only grant loans if they realize that you still have enough returns to make monthly payments even when the new loan is granted. Lenders use the Debt Service Coverage Ratio (DSCR) to calculate your loan affordability. This DSCR is a ratio of your debts and interest rates to your current income cash flow. A high DSCR increases your chances of accessing a loan.
- Contracts and Agreements
You will also be asked to reveal any legal contracts and agreements your company is involved in. Other important documents such as corporate bye-laws, franchise agreements, and partnership agreements. The lender wants to be sure that the partnerships and agreements will not affect your financial position. If it affects your financial position, it may affect your ability to repay the loan.
- Ownership and Affiliations
Your ownership and affiliations are also crucial to the lender. The lender will like to know if you are affiliated with other companies or have a stake in another company. If you are a board member or a consultant in another company, the lender will need details about it. Lenders use this to identify any potential conflict of interest the lender may have when other are other companies involved.
Lenders may also request for other things such as the Employee Identification Number (EIN) and annual business report. It is essential to have these common requirements to facilitate the loan process. Since lenders have different requirements, your lender may ask for other requirements. You should cooperate with the lender to make the process less stressful.