Sadly, you’ll need to meet many specific bank loan requirements to qualify. In most cases, small business owners have difficulty meeting all of them. Or, even if they do, the process takes too long, especially if they have an immediate business need.
This blog post will detail what a typical bank will expect from a small business loan applicant. After reading this blog post, you can determine if this is the right financing option for your small business.
Are You Aware of These Bank Loan Requirements?
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. Also, to qualify for SBA loans, you’ll usually have to prove that you need funding for an approved cost.
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 wish to use your loan? Consider applying for 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 because they can use their funding however they decide, instead of spending 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. However, 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 may need 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 submitting 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 companies that operate as proprietors or partnerships. In both cases, the business owner assumes partial or complete financial responsibility.
Before applying for a bank loan, make sure that you know both scores. If your scores are below the minimum requirements, you can work to raise them before applying.
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 an excellent credit score, you might not get approved for a bank loan due to the bank’s credit requirements. Or, even if you do qualify for a business loan, it might affect the interest rate. Instead of wasting time applying for bank-issued financing, you might want to pursue other business financing options.
Some lenders 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 before deciding.
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:
- Addresses
- Criminal record
- Information on your education
- Tax returns
- Financial statements
- Assets
- Personal Loan Balances
6. Financial Statements
In addition to personal financial information, you’ll also need to submit your business’s financial statements. The number of statements will vary depending on the bank you’re applying to and their requirements.
Most banks will require the following documents:
- A balance sheet
- Accounts receivables
- Profit and loss statements
- Cash flow statements
- Income statements
- Business bank account balances
- Other financial projections
Once submitted, the bank will analyze these documents to determine whether you are a strong loan candidate.
7. Collateral
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. Banks typically seek structural collateral for larger loans, 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.
If you’re taking out a loan for a specific type of equipment or inventory, that object may be considered collateral. For example, if you’re taking out an auto loan, you could use the automobile as collateral if you can’t repay your loan.
8. Cash Flow
When evaluating applications, banks’ primary financial concern involves business cash flow. Does your business generate enough cash flow to repay a bank loan on time? The bank will ask you to present information about your primary business cash sources to determine this. 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 apply for a small business loan before 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.
In addition to your debts, you’ll also need to maintain your business, which probably includes
- Rent payments
- Inventory orders
- Payroll
- Other ongoing costs
Understandably, lenders don’t want to take on clients with 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
If you’ve applied for a personal loan, the lender may have asked you to sign a personal guarantee. In some cases, you may need to sign this document to secure a small business loan from a bank.
This document is a written promise stating that you, as the business owner, will repay your small business loan using your personal assets if your business can’t pay its loan balance.
The bank may require you to pledge specific assets for additional security in some cases. These collateral assets may include your personal finances, home, or investment accounts.
Next Steps: Consider Your Business Financing Options
To receive a bank loan approval, the small business loan requirements you must meet might appear intimidating. However, with careful planning, your small business may be able to obtain financing successfully.
If you don’t want to go through the tedious bank loan application process, it might be good to apply for a business loan from an alternative lender. You can still receive the business financing you need but won’t go through a long, complicated application process.
Editor’s Note: This post was updated for accuracy and comprehensiveness in February 2022.
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.
