When it comes to applying for a business loan, it's best to apply for one before you need it. But you have to come to your loan application meeting ready—many company owners are not able to meet business loan requirements when they need cash because they haven't prepared.
You should assemble the documents and other information necessary to qualify for a business loan well before you step into an office. And you should at least know what the lender's specific guidelines are before you need capital.
Interested in learning how to qualify for a business loan? You'll need to have the following documents and information on hand.
1. Credit Score
Most lenders believe that past results reflect what will happen in the future. They rely on personal and business credit scores to reveal this information. One of the first business loan requirements is for both the company and the owner to have great credit scores. The lower the credit score, the higher the perceived risk, according to the lender. (For companies, excellent scores are above 80. For business owners, good personal credit scores are above 750.)
You can obtain your personal credit reports at no charge once a year at AnnualCreditReport.com and dispute any inaccuracies you find through any of the credit bureaus' websites. Businesses can check their scores at three business credit bureaus: Experian, Equifax and Dun & Bradstreet, but in each case, will need to pay a fee to see the full version of the report.
Over time, you can improve your personal credit score by paying all your bills on time and having a low personal debt to credit ratio. Businesses can improve their scores by keeping their data current and adding more vendor relationships to their credit record.
2. Annual Revenue
One of the chief business loan requirements for a lender is a clear picture of the trends in your business, especially how sales and cash flow have grown.
Make sure you have accurate monthly financial statements from the past two years on hand. They will look at specific metrics like the current ratio, which is your current assets divided by current liabilities. (If that ratio is greater than one, it signals your company's ability to pay all its bills.)
Many lenders will also ask for copies of your bank account transactions so they can confirm cash flows that are reflected on your financial statements. Remember, the qualifications for a business loan depend more on growth in cash flow and less on revenue.
3. Updated Business Plan
Lenders want to know how the loan will be used and how the company plans to grow. You should be able to thoroughly discuss the age and stability of your company in its industry. Be ready to share an up-to-date copy of your business plan, which includes projected financial statements and a plan for how you will pay the money back.
Don't forget to include the resumes of key managers in your company and how they will make a difference. Even with all the financial numbers and documents, one of the critical business loan requirements is proof that the people who help operate your business have the relevant experience and credentials to repay the loan.
4. Additional Collateral
Every lending source wants to reduce their risk when making a loan. One of the ways they do this is by getting additional financial collateral that secures the loan in case your business fails to meet its repayments. This is usually done in the form of a company's accounts receivable, equipment or any other easy-to-sell assets.
One of the additional qualifications for a business loan may be for the company's owner to provide a personal guarantee to their loan, or pledge additional collateral such as personal real estate or other financial resources.
Credit scores, annual revenue, business plan and collateral are the four cornerstones of most business loan applications. But note that there are many other supporting documents you'll need to qualify for a business loan. They can include:
- your driver's license
- any commercial leases
- business licenses
- personal and business tax returns
- business insurance plans
- payroll records
- incorporation documents
- other affiliated corporate ownership or
- current added financial obligations.
The process of applying for a business loan can reach into nearly every corner of your financial history, personal and business, To avoid the stress of last-minute scrambling, organize the necessary documents ahead of time.
Read more articles on loans.
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A version of this article was originally published on December 2, 2019