10 Bank Loan Requirements You Must Be Prepared For
1. Purpose of Loan
While some lenders don’t have usage restrictions, most will want to know how you plan to spend it. For instance, some businesses experience resistance from banks when they apply for a loan to reduce existing debt.
In comparison, banks usually approve of businesses using loans for the following reasons:
- Improve Cash Flow
- Purchase Equipment
- Pay for Expansion Projects
- Purchase Inventory
- Use as Payroll
Don’t want to worry about a bank critiquing how you want to use your loan? Consider applying you financing from an alternative or online lender. Typically, these lenders won’t have usage restrictions, so you’ll be able to utilize your loan how you see fit.
Business owners often prefer to work with alternative business lenders for this reason; they can use their funding however they decide, instead of having to spend it on one specific, pre-approved cost.
2. Business Experience
When reviewing your loan application, banks will consider how much experience you have. If you’ve owned your business for years and have managed your company’s finances responsibly, this will be in your favor. In comparison, if you’ve recently opened your business, or have struggled financially, this could be detrimental.
Ultimately, bankers will be more likely to approve your application if they think you’ll remain successful after receiving your loan. If the bank isn’t confident that you can submit your monthly payment on-time and in-full, you probably won’t get approved.
3. Business Plan
When applying for a bank loan, you might be asked to submit your business plan. Although it may seem tedious, your business plan can help the bank determine the right loan amount and term for you.
Before you submit your business plan, make sure that it accurately reflects your business’s finances, goals, and other relevant information. You might even benefit from having a fellow entrepreneur review it, so that they can provide feedback.
4. Credit History
When considering your business for a loan, a bank will conduct a credit check. They’ll do this to determine your personal and business credit scores. Personal credit history especially matters for businesses that operate as proprietors or partnerships. In both cases, the business owner assumes partial or full financial responsibility for the company.
Before you apply for a bank loan, make sure that you’re aware of both scores. This way, if your scores are below the minimum requirements, you can work to raise them prior to applying.
To do this, you should obtain a personal credit report from the three major credit unions (Equifax, Experian, and TransUnion). In addition, you can determine your business’s credit score by requesting a free Business Information Report from Dun & Bradstreet.
If you don’t have a good credit score, you might not get approved for a bank loan due to the bank’s credit requirements. Or, even if you do qualify, it might affect the interest rate that you’re charged. Instead of wasting time applying for bank-issued financing, you might want to pursue other business financing options.
There are lenders that specifically provide bad credit business loans, or are more open to working with business owners that might not have an excellent score. Again, this is why weighing your funding options is crucial prior to making a decision.
5. Personal Information
Even though you’ll be borrowing money for your business, some personal information could affect your ability to qualify. As we mentioned in the previous section, your personal credit score will affect your eligibility. In addition, banks usually also request the following personal information in your application:
- Criminal record
- Information on your education
- Tax returns
- Financial statements
- Personal Loan Balances
6. Financial Statements
In addition to personal financial information, you’ll also need to submit your business’s financial statements. The amount of statements will vary depending on the bank you’re applying to. Most banks will require a balance sheet, profit and loss statements, cash flow statements, income statements, and other financial projections. In addition, they may want to see your business’s bank account balances.
Once submitted, the bank will analyze these documents to determine whether you are a strong loan candidate.
Even if your business or personal credit history falls below bank loan requirements, you could still receive financing by submitting collateral. Banks define collateral as business or personal property that you put up to guarantee the repayment of a loan.
The bank will match collateral with the value of the loan you want to obtain. For larger loans, banks typically seek structural collateral, such as a home or an office. For business collateral, lenders also consider equipment and inventory.
Other forms of collateral include automobiles, expensive jewelry, and high-end antiques. The expected useful life of your collateral must match the lifespan of the business loan.
8. Cash Flow
The primary financial concern for banks when it comes to accepting applicants involves business cash flow. In other words, does your business generate enough cash flow to repay a bank loan on-time? To determine this, the bank will ask you to present information about your primary business cash sources. Most banks understand that managing cash flow is a common challenge for business owners, especially entrepreneurs that own seasonal businesses.
9. Information on Outstanding Loans and Other Debts
Many business owners make the mistake of applying for a small business loan prior to paying off their outstanding loans and other business debts, such as their credit card balance.
Although the need for additional financing is understandable, applying for another loan can hurt your credit in many cases. This is because you’ll have another debt to be responsible for, which can be very challenging for business owners. In addition to your debts, you’ll also need to maintain your business, which probably includes rent payments, inventory orders, payroll, and other ongoing costs.
Understandably, lenders don’t want to take on clients that have outstanding debt, because they likely won’t be able to repay their balance in their set loan term. Due to this, you might not qualify if you have a loan balance that you still need to finish paying.
10. A Personal Guarantee
With many types of loans, bank lenders may require the business owner to sign a personal guarantee.
This document is a written promise stating that you as the business owner will repay your small business loan using your personal assets in the event your business can’t pay it’s loan balance. In some cases, the bank may require you to pledge specific assets for additional security. These collateral assets may include your personal finances, home, or investment accounts.