What Financial Documents Are Required for a Business Loan?
Without any quantification of risk, lenders couldn’t make smart decisions about what applications to approve and how much interest to charge.
That, in a nutshell, is why financial documents for business loans are so important.
All this to say, if you’re thinking about applying for a loan, you should know what financial documents are required.
Financial Documents Required for a Business Loan
For a traditional business loan from a bank or credit union, you should expect to be asked for the following financial statements and documents:
- Credit report
- Personal and business bank account statements
- Personal and business tax returns
- Income statement
- Balance sheet
- Cash flow statement
- Accounts receivable and payable aging
- Debt schedule
- Business plan
- Business licenses
In some cases, you may also need a signed personal guarantee and/or proof of collateral. Of course, alternative lenders often offer business loans with less required documentation. That said, even alternative lenders may ask for all these documents as well.
Why Lenders Require these Financial Documents
We covered the high-level reasons lenders require business financial documents. However, each document listed above helps lenders evaluate specific aspects of your application.
If you understand how each document affects your lender’s evaluation, you can make informed decisions on how to improve your application. To that end, the next section will summarize what lenders look for in each document you provide.
Your business and personal credit reports show lenders how you handle debt. If you have lots of missed payments or defaults, lenders will hesitate to approve your application. Your credit report also shows your credit score and many lenders have minimum scores that you must meet.
Bank statements and tax returns
Lenders use your bank statements and income tax returns to double-check the accuracy of your other financial documents. Specifically, they want to see that the income and operating expenses your bank statements show line up with your income and cash flow statements.
This is why it’s so important to ensure any reports you submit to your lender are accurate. If there are mistakes on your credit report, your lender will find them.
Income statement, balance sheet, and cash flow statement
Credit scores are useful to lenders as a tool to weed out bad borrowers. However, they need more detail to effectively evaluate more creditworthy small business owners. In other words, good credit isn’t enough to get approved for a business owner.
Lenders want to see that your business is generating enough revenue and cash for you to take on a loan. The income statement, balance sheet, and cash flow statement combine to help a lender evaluate your business’s financial performance.
Accounts receivable and accounts payable aging reports
Your accounts receivable aging report shows how long it takes for your customers to pay their bills. The accounts payable aging report shows how long it takes for you to pay your vendors. Both data points are important for financial institutions because they give clues to potential problems.
If your customers are often very late with payments, you’re more likely to face unexpected cash shortages. To the lender, that’s a red flag because late payments may result in you being unable to pay your loan.
If your accounts payable report shows that your business is often late to pay suppliers, that’s another red flag. After all, if you’re unable to pay your vendors on time, it’s either because you have cash problems or you’re unreliable. In either case, overdue payments to vendors don’t look good on your loan application.
One very important metric to any lender is a borrower’s debt-to-income ratio or DTI.
As the name of the ratio indicates, DTI is a measurement that compares your debt to your income. The higher your debt balance and the lower your income is, the higher your DTI. The higher your DTI, the less attractive your loan application is. After all, if you have a large amount of debt and low income, you are a risky borrower.
Loans and Lenders with Fewer Documentation Requirements
So far, we’ve been talking about the documentation requirements of a traditional business loan. Traditional business loans from credit unions and traditional lenders tend to have the most extensive documentation requirements.
However, there are alternative lenders, loan types, and other financing options that don’t require as much documentation. Generally speaking, online lenders require less documentation than traditional lenders. Yet many loans require even less.
Financing options with fewer documentation requirements than traditional and online business loans include:
- Merchant cash advances
- Invoice factoring
- Equipment leasing and financing
- Business credit cards
Conclusion: Make it Easy on Yourself to Secure Financing
If you need a business loan, you shouldn’t let the documentation requirements stop you. As overwhelming as it may seem to muster up all these documents, it’s smart to have them organized anyway. After all, it’s not just lenders that need to see these documents.
You and your business partners should regularly be evaluating your financial documents. Otherwise, you won’t have an accurate sense of your business’s financial performance. So do yourself a favor and get these documents organized. Or, work with your accountant to ensure your financial documents are easy to access.
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.