The good news about applying for a small business loan is that most lenders have more or less standard requirements. Each program would have specific forms, but generally, small business loans all require the same documentation. So before you even start the application process, it’s a good idea to gather what you’ll need.
1. Why Do You Need the Small Business Loan
Do you need working capital? Do you want to purchase material? Are you looking to expand and add new staff? Is it for inventory? Lenders will want to know the specifics of why you need financing, and you should be prepared to justify your small business loan request.
Once you know what you need the money for, you can start applying online for your loan. Some lenders require that you come into their offices and fill out a paper application, but this can be problematic because each one will do a hard pull of your business credit history. Multiple hard pulls are often interpreted as a sign of desperation, causing banks to question your creditworthiness.
A better bet would be to have Lendio pair you with the best lender for your needs. Lendio’s tools allow you to view and compare available options, choose the type of loan you’re interested in, complete only one application (which will enable you to receive multiple offers from lenders), and get funded.
2. How Much Capital You’ll Need
Each organization will have its own requirements, but a standard loan proposal will include the precise amount you’ll need to borrow, and the exact purpose of the loan. The institution may also want to know your market position, business techniques, and the legal structure of your business. If you’re applying for a Small Business Administration (SBA) loan, you’ll need to fill out their Form 4, which seeks information on the amount of funds you’ll need, and its purpose.
3. Knowledge of Your Credit History
Your capacity to pay debt is gauged by your credit score, and this can fall anywhere between 300 and 850. As part of the application process, your lender will pull your personal credit report. It’s critical that you clear up any discrepancies and other outstanding matters that may appear on your report before this happens.
Be prepared to tender a credit report for your company if your business is already up and running. As with the personal credit score, you should try to rectify any blemishes on your business credit report before applying for a commercial loan.
If you already have an established business, you can look at your business credit score at any of the three major business bureaus: Equifax, Experian, or Transunion. You will need good scores on both your business and personal credit reports to meet the requirements for a conventional business loan at a bank or the SBA, though this will hinge on the particular lender and dynamics such as your cash flow and business revenue.
You’ll need business and personal tax returns for the last two years. You’ll also need profit and loss statements, and a balance sheet for your business. In addition, your lender will require your business license and articles of incorporation. It would be beneficial to have a business plan, and projections for the next few years as well. All of these documents will help you look good as you speak to potential lenders.
You’ll likely need to offer some personal info, either as an independent file or as part of the loan application. This includes names used, previous addresses, educational background, criminal record, etc. You may also need to send your resume, especially for advances that can be used to start a new business, as some lenders require evidence of management or business experience.
5. How Much the Lender is Willing to Loan You
The rule of thumb for business is ten percent of revenue for unsecured business loans. If you can use collateral, the bank may be willing to lend you much, much more. SBA backing is also critical: banks have become skittish about lending to small businesses, and many of them have developed tighter loan guidelines. Note that with SBA backing, the borrower must be willing to make a personal guarantee.
It’s best not to try to tackle this list all in one go since it’s a long and involved process. Rather, work on one aspect of it at a time. Pay attention to detail and try not to rush it. Online platforms such as Lendio make the process easier, so spend some time getting familiar with their platform. You should also pay attention to the SBA guidelines as the Administration may be critical to your securing a small business loan.