8 Bank Loan Requirements You Should Know About
Purpose of Loan
Although some lenders don’t care how you use a business loan, most banks will want to know why you want a loan and how you plan to spend it. You can experience resistance from banks because some businesses apply for a loan to reduce existing debt. On the other hand, most banks view using loans for expanding a profitable business as an effective way to earn interest income. Bank-approved reasons for applying for loans include improving cash flow, purchasing equipment, and financing an expansion project, just to name a few examples.
If you don’t want to worry about a bank critiquing how you plan to use additional financing, you could instead apply for financing from an alternative lender. Many lenders don’t limit how you can utilize your financing, so you won’t have to worry about this aspect.
When reviewing a loan application, banks will consider how much experience you have. If you’ve owned your business for years, and have managed to run it in a financially-responsible manner, this will be in your favor. In comparison, if you’ve recently opened your business, or have struggled financially, this could be detrimental. Ultimately, a banker will be more likely to approve your application if they think you are a skilled business owner who is going to continue having success after you’ve received your loan. If they aren’t confident in your business’s future, or that you can repay your loan, you probably won’t get approved.
When applying for a bank loan, you might be asked to submit your business plan. This might seem tedious, but your business plan can help a bank determine the loan amount and term to provide your business with. Before you submit your business plan to a bank, ensure that it accurately reflects your business’s financial situation, future goals, and other relevant information. You might even benefit from having a fellow entrepreneur review it, so that they can provide feedback.
When considering your business for a loan, a bank will want to see your personal and business credit scores. Personal credit history especially matters for businesses that operate as proprietorships 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 bank’s basic credit requirements, you can strive to raise your scores prior to applying. Obtain a personal credit report from each of the three major credit reporting areas (Equifax, Experian, and TransUnion) to determine your credit strengths and weaknesses. To determine your business’s credit score, request a free Business Information Report from Dun & Bradstreet.
If your credit score is less than stellar, it might be challenging to be approved for a bank loan. Instead of wasting time applying for bank-issued financing, you might want to pursue other options.
Even though you’ll be using this loan for your business, some personal information could affect whether you qualify for a bank loan. 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
If you think any of this information could affect your application, consider having your partner apply for this loan instead (if applicable).
In addition to personal financial statements, you’ll of course 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 your business’s balance sheet, profit and loss statements, cash flow statements, income statements, and other financial projections. Once submitted, the bank will analyze these documents to determine whether you are a strong loan candidate.
Even if your business and/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.
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 amongst the biggest challenges that business owners face, especially small businesses that operate on seasonal sales.
The qualifications you must present to receive approval for a bank loan might appear to be intimidating. However, with careful planning and keen foresight, your small business should be able to implement the most effective strategies that lead to the financing of your operation.
If you don’t want to endure the bank loan application process, or think that you won’t qualify, consider applying for a business loan through an alternative lender. This way, you can still receive the financing you require, but won’t have to go through as long of a process to receive it.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.