Business bank loans offer an opportunity for entrepreneurs to build a business or expand existing ones.
Applying for a business loan may sound daunting for most applicants. Banks often require a long list of documents that need to be collected, compiled and submitted with the application. However, most requirements are straightforward and common among different banks.
Here are some of the most common requirements that can affect your chances of getting a business bank loan.
1. Credit Score
One of the most important factors that can affect your application is your personal credit score. Most first time applicants won’t have a business credit history. Because of this, the applicant’s personal credit history is the closest document that can reveal how the individual or business intends to handle its debts. This single document lets the bank know how reliable you are in paying back your loans.
For banks, the most ideal credit score is above 700. With this credit score, a bank can offer you a wide selection of options. The number of options decreases when your credit score goes below this number. Under 600, your options are limited, but this does not mean that banks will automatically decline your application.
2. Personal and Business Tax Returns
Another important document is your personal tax return. If you have opened businesses before, you may need to submit those with your application as well. Ideally, you will need to submit your tax returns for the last two years. If you were behind on your taxes, you can file for an extension and submit this document along with your loan application. You may still need to provide a written explanation as to why you were behind on your taxes and applied for an extension.
3. Use of funds
Besides showing banks your financial history and ability to pay them back, you will also need to let lenders know how you plan to use the funds or the loan amount you receive from the bank.
Some banks will stipulate limitations when it comes to where you can or cannot use the funds. What the banks want to know is that you are investing their money in an endeavor that will earn a profit. It is the this profit that will allow you to pay back the entire loan amount plus the interest on the agreed upon schedule.
4. Balance Sheet
Provide a copy of your business’s balance sheet. The balance sheet includes details of your business’s assets as well as liabilities. This type of document shows lenders your business’s current financial health.
Lenders will check this document carefully to see if you or your business have enough assets to cover the costs of running the business and still make your scheduled loan repayments.
5. Income Statements
Also referred to as revenue statements or profit and loss, this document gives lenders a detailed view of the cash flow in your business. It shows how much goes in, where the money goes, and how much you have left on a monthly basis or for a given period.
Lenders will go through this document carefully to make sure that you or your business will have enough to make the payments. Besides your most current statement for the entire year, banks may request revenue or income statements for the last two to three years as well.
6. Business Plan
Most banks will ask for a copy of your business plan. This shows lenders an overview of your business. It lets them know the type of business you are running, what it offers, how it started and the people running your organization. Business plans don’t have to be long. Lean business plans include the basics such as a company summary, the product or services offered, the target market, the members of your team, and financial details.
There are plenty of reasons why entrepreneurs would take out a business loan. Business loans can help you grow your business. If you plan to take out a business loan, contact your local business bank. Learn about their loan application process, requirements and terms. Providing comprehensive documents that show your ability to manage your business well and pay back the loan amount can improve your chances of getting your business loan application approved.