If you have an idea for a new business or a plan for expanding your existing business, your ability to achieve your goals could depend on your ability to receive financing. A transparent understanding of small business loan requirements can better prepare you for the types of questions a bank might ask and the things you will need to provide.
You & Your Business
While business and personal loans are different, you will likely find that your ability to secure financing for your small business is contingent on your own history and characteristics.
Banks expect borrowers to provide fundamental personal insights. This includes current and previous addresses, educational level, criminal record, and a credit report, along with other information. A lender’s willingness to give your company credit is going to depend directly on your financial situation, such as your current income-to-debt ratio, debt history, and ability to contribute personal assets as collateral.
Obtaining a small business loan may also be determined by your ability to convince your loan specialist that your business plan is viable. This will come down to your experience, education, credibility, and ability to present a well-conceived plan.
Small Business Loan Bank Requirements
What exactly do lenders expect of you when considering your company for a small business loan? Here are some general loan requirements to check off before you submit a loan application:
1. Personal Credit History
Unless your business is already well-established and profitable, your personal credit history will take the place of your company’s financial history. Before you try applying for a small business loan, it’s a good idea to understand where your credit stands with each credit bureau and if any improvements need to be made.
2. Business Plan
In most cases, your ability to repay your business loan will depend directly on the success of your business, so lenders are going to want to see a viable business plan. Business loans are only distributed when there is a predictable rate of return on investment for the capital provided. Your business plan should be a strategic document that includes an overview of your business goals, a competitive analysis, a marketing plan, and well-researched data on price points and cost factors.
3. Business History and Projections
If you have an existing business, your lender is going to want to review a list of the organization’s liabilities and assets to ensure that your business is not financially over-extended. Balance sheets and cash flow statements provide lenders a dynamic representation of whether your business is growing and succeeding, or failing. If your company has not had the chance to build up this type of history, you will need to demonstrate credible projections that give your creditor confidence in your ability to repay the loan.
4. Asset Base
Most banks won’t release finances without securing it against an asset. For a larger corporation, assets may include machinery, office equipment, or any real estate the organization owns. Businesses can also use stock and intellectual property as an asset if it has a fair market value. In some cases, the bank will request collateral. However, it is generally only necessary for low-rate installment debts and start-up loans. Using personal assets is possible, but not always preferable.
5. Industry Experience
Banks rarely gives loans to individuals in a business that they don’t have any experience in. Most creditors will want to know to see the company founders or board members who have experience and knowledge in building a profitable business. If you don’t have experience in your desired industries, add valuable members to your time by seeking business advisors. This will not only help you in obtaining a loan, but these advisors can play an essential role in problem-solving while you feel out a new industry.
Keep in mind that the entire application process is about getting the lender to believe in you and your business. While the above criteria are important, your organization, thoroughness, and belief in yourself while presenting the information can make or break your ability to receive a small business loan.