Business loan requirements differ depending on the lender, the type of loan and your business. Begin by identifying potential lenders – such as your own bank or credit union, or the small business administration. Then find out what type of documentation they require. You may want to start your research three-to-six months (or even a year) prior to actually needing a loan, so that you can gather/prepare the documentation you need, work on improving your credit score, and assess what you can offer as collateral.
In general, though, these are the things you can expect you will need to have a chance at being approved for a traditional business loan.
1. Excellent credit score
If you own a smaller business, the bank will typically look at your personal credit score to determine whether to approve a loan. A score of 720+ is the sweet spot, as long as your personal credit is not overextended.
Review your score and if it is low, begin working on repairing it. Many small businesses rely on their personal credit to launch their business and carry it for the first year or two so it’s not uncommon to carry high debt. Or you may have run into credit problems due to health issues or other personal issues. Assume it will take at least a year to repair your credit.
Every loan agreement is different, but typically your collateral will exceed the amount of money you want to borrow. That’s because it’s unlikely that the lender will be able to get the full value of your collateral when it is liquidated – the collateral’s value may depreciate, or the lender may have to accept a lower price to liquidate it quickly. So, your $70,000 loan may require $100,000 in real estate collateral. If you’re securing the loan with something like inventory, you’re likely to get only 50% of the actual value of your inventory – so a $50,000 loan would require at least $100,000 in inventory as collateral. These figures assume the business has a good cash flow, and is very healthy. If your business is new, or is struggling financially, you’ll have to provide more collateral.
3. A Business Plan
A well-written business plan is essential part of your loan application package. It details your marketplace, your company’s value proposition and your growth strategy. You are making the case for the profit potential and trustworthiness of your business. You can get complete details on how to write a business plan here.
Banks typically want to see three to five years of your personal income tax returns, and potentially your business returns as well. You’ll need to create (or, much better, have your accountant create) monthly or quarterly financial projections for the next year, then quarterly and/or yearly projections for the term of the loan. And you’ll need to provide your personal and business bank statements for the past 12 months.
The bank may want to see your business licenses and registration, insurance, leases, articles of incorporation, third-party contracts (with suppliers, or customers), franchise agreements and similar information.
You will also need to bring proof of collateral, showing that you own the assets you will pledge as security for repaying the loan. Documentation could include titles, contracts, deeds and receipts. The bank may also ask for valuation proof, such as insurance coverage.
5. An Established Business
Traditional bank loans will rarely be approved if your business opened less than a year ago. It takes time to establish credit and convince lenders that your business has a good chance of surviving.
Also, banks tend not to lend money to small businesses that work in industries that are considered high-risk – either the industry is volatile, like restaurants that tend to open and close quickly. Other industries, like adult dating services, nutritional supplements, and travel can be considered risky too, as they have a higher percentage of cancellations/returned products. If you had a difficult time getting a merchant bank account, chances are you’ll have a difficult time getting a traditional bank loan.
6. A Lucky Break
No matter how wonderful your business plan and credit score is, you’ll probably still struggle to access working capital from banks. The application process is complex and demanding, requirements are strict, and banks aren’t thrilled about extending loans to small businesses. You may not have the time, know-how, patience or credit history to qualify for the same financing options that were designed to meet the needs of big businesses.
Even if you don’t qualify for a traditional loan or need funding faster than the month or two it typically takes to process a bank loan, you have options. Alternative lenders offer innovative funding products specifically designed to meet small business needs.
The easiest way to find an alternative lender is to get pre-approved by One Park Financial, which then gives you access to a funding expert who can discuss your business needs and options to determine what funding types best meet your needs.