Business loan requirements differ based on the lender, the type of loan, and your business. You should start by identifying potential commercial loans that are a good fit for your business. You should start off by looking at lenders such as your own bank or credit union, or your local small business administration. Afterwards, it is advisable to investigate what type of documentation each of the institutions requires to find out which is the best for you.
We recommend that you start your research three to six months (or even a year) before you actually need a loan, that way you will have enough time to gather / prepare the documentation you need. You will also have enough time to work on improving your credit score and evaluate what you can offer as collateral when applying for business loan. Generally speaking, these are the things you may need to increase your chances of being approved for a traditional business loan:
If you are a small business owner, the bank will generally review your personal credit score to determine if the loan is approved. A score of 720+ is the sweet spot as long as your credit is not overloaded.
Check your score and if it’s low, start fixing it. Many entrepreneurs and entrepreneurs rely on their personal credit to launch their business and run it that way for the first couple of years. Therefore, it is not uncommon for them to incur high debt. If at any time you had or have had credit problems due to health problems or other personal issues, it is important that you take into account that it will take you at least a year to repair your credit to be able to apply for some type of commercial loans.
Each loan agreement is different, but generally your collateral will exceed the amount of money you want to borrow. This is because it is unlikely that the lender will be able to obtain the full value of your collateral when it is settled; the value of the collateral may depreciate or the lender may have to agree to a lower price in order to pay it off quickly. So your $ 70,000 loan may require $ 100,000 in real estate collateral, for example. If you are securing the loan with something like inventory, it is likely that you can only get 50% of the actual value of your inventory, that is, a $ 50,000 loan will require at least $ 100,000 in inventory as collateral. These figures assume that the business has good cash flow, and that it is a favorable business.
A well-written business plan is an essential part of your loan application package. This business plan should detail what your market is, the value proposition of your business and your growth strategy. Through the business plan you are defending the profit potential, the estimated growth of your business and its reliability.
Banks generally want to see the last three to five years of both personal and business tax returns. You should create (we recommend that your accountant do) monthly or quarterly financial projections for the next year, quarterly and / or annual projections for the term of the loan. You will also need to provide your personal and business bank statements for the last 12 months prior to your loan application.
The bank may also want to view your business licenses and records, insurance, lease agreements, articles of incorporation, third-party contracts (with suppliers or customers), franchise agreements, and similar information to validate much of the aforementioned information. We recommend that you have this documentation on hand as well.
Finally, you must present a guarantee voucher that shows that you own the goods that you will deliver as collateral to pay the loan. Documentation could include titles, contracts, deeds, and receipts. The bank may also request proof of valuation, such as insurance coverage.
Traditional bank loans will rarely be approved if your business opened less than a year ago. It takes time to establish a credit history that can convince lenders that your business has a good chance of succeeding.
In addition to this, banks tend not to lend money to small businesses that work in industries that can be considered high risk. Industries such as restaurants, adult dating services, nutritional supplements, and hospitality tend to be more complicated when it comes to borrowing as they can be considered volatile and have a high percentage of product cancellations / returns. If you had difficulty obtaining a bank account for your business, it is very likely that you will also have difficulty obtaining a traditional bank loan.
No matter how great your business plan and credit score are, you will still likely have a hard time getting working capital from banks. The application process is complex and demanding, the requirements are stringent, and banks are not excited about having to make loans to entrepreneurs and small businesses. You may not have the time, knowledge, patience, or credit history to qualify for the same financing options as large companies.