8 Bank Loan Requirements You Should Know About
Sadly, there are many specific bank loan requirements that you’ll need to meet in order to qualify. In most cases, small business owners have difficult meeting all of them. Or, even if they do, the process takes too long (especially if they need financing quickly).
In this post, we’ll detail what a typical bank will expect from a loan applicant. Once you’re finished reading, 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.
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 want to use your loan? Consider applying you for financing from an alternative or online lender. Typically, these lenders won’t have usage restrictions, so you won’t have to worry about this aspect.
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 finances responsibly, this will be in your favor. In comparison, 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 make your monthly payment, you probably won’t get approved.
3. Business Plan
When applying for a bank loan, you might be asked to submit your business plan. It might seem tedious, but your business plan can help the bank determine the right loan amount and term for you.
Before you submit 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 businesses that operate as proprietors 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 minimum requirements, you can work to raise them prior to applying. To do this, 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 a good credit score, it might be challenging to be approved for a bank loan. Or, even if you do qualify, it might affect the interest rate that you’re charged. Instead of wasting time applying for bank-issued financing, you might want to pursue other options.
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:
- Criminal record
- Information on your education
- Tax returns
- Financial statements
- Personal Loan Balances
6. Financial Statements
In addition to personal financial information, you’ll 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 a balance sheet, profit and loss statements, cash flow statements, income statements, and other financial projections. In addition, they may want to see your business’s bank account balances.
Once submitted, the bank will analyze these documents to determine whether you are a strong loan candidate.
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. 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.
8. Cash Flow
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 a common challenge for business owners, especially entrepreneurs that own seasonal businesses.
The prerequisites you must meet to receive a bank loan approval might appear to be intimidating. However, with careful planning, your small business may be able to successfully receive financing.
If you don’t want to go through the bank loan application process, it might be a good idea to apply for a business loan from an alternative lender. That way, you can still receive financing, but won’t have to go through a long, complicated process.
Editor’s Note: This post was updated for accuracy and comprehensiveness in July 2019.
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.