Bank Loan Requirements for Businesses
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You’ve decided to take your business to the next level. Maybe that means expanding into a new market or introducing a new product. Perhaps it means acquiring a competitor or possibly even adding more staff. Whatever your plan, you need cash to do it.
Who do you turn to?
If you’re like many business owners, your first stop is the bank. Unfortunately, it’s not always easy for businesses to get approved for bank loans. Banks sometimes run tight margins on their lending operations. Just one bad loan can be enough to disrupt their entire business. That means they’re often only willing to extend financing to the most qualified applicants.
Before you start that process, take some time to evaluate the following questions that banks will most likely ask your business. If a bank loan doesn’t seem the best fit, you may be better served by pursuing other options.
Have you filed the last three years of business tax returns?
Banks want to see your revenue and income claims verified by official documentation. That usually comes in the form of tax returns. If you’re behind on filing your tax returns, or if there are accuracy issues with your returns, then a bank loan may not be the best solution for you.
Have all the business partners/members/owners filed the last three years of personal tax returns?
Banks don’t just look at the business; they also look at the owners behind the company. If you or your partners have delinquent tax returns or tax accuracy issues, that could be a significant complication in your bank loan application. Before you file for a bank loan, review at least your last three personal returns to ensure they’ll pass a close inspection.
Does your business keep accurate accounting?
Tax returns aren’t the only documents you will need. The bank will also want to see your accounting records. Remember, banks inspect business records every day. The bank will notice if your accounting is off or inaccurate, which could ruin your chances of getting approved.
Do you prepare financial statements for your business?
Financial statements offer the bank a snapshot of your business and its financial health. The bank will likely want to see your balance sheet, income statement, and record of cash flows for at least the past few years.
Does your business have collateral to secure a loan?
Unless you have exceptional credit and extremely low risk, the bank will likely want collateral for the loan. It could be property, vehicles, or machinery. Some banks will even consider receivables. Review your assets and see what you could use as collateral.
Does your company have a business plan?
The bank will also want to know how you plan on using the funds. The best way to present this is through a formal business plan. Use the plan to tell your business’s story and to show how the loan will fund future growth and profitability.
Has your company been profitable for the last three years?
Your business needs to be established, but it also needs to be profitable. If the bank sees consistent losses in your business, they’ll likely hesitate to offer you a loan.
Does your company have a good credit story?
What is your company’s credit history? Do you have a record of paying on time? Have you avoided collections accounts and judgments? Can your vendors serve as solid references? If not, the bank may be reluctant to offer you a loan.
Do the company partners/owners have credit scores above 700?
The bank will look at the individual owners even if the business has good credit. Each owner should have very strong personal credit, scoring 700 or higher. If that’s not the case, you may need credit repair work before pursuing a bank loan.
Does your business prepare an annual budget?
Banks want to partner with businesses that are prudent with their money. They’ll want to see your budget and know how you stay within it. They may question whether you will be responsible for their funds if you don’t have a budget available.
Are your company assets greater than your obligations?
Debt is a standard component of most business balance sheets. A bank will understand if you have liabilities on the books. However, they may not understand if your liabilities exceed your assets. In that case, the bank may consider the business insolvent and unworthy of additional credit.
Are all business partners/owners willing to offer personal guarantees to secure the loan?
Personal guarantees are a common part of bank financing. The bank wants to know that you will personally pay the loan even if the bank cannot. Unwilling to risk your assets? If so, then a bank loan may not be for you.
These are the Typical Bank Loan Requirements for Businesses
Although not all banks require the same documentation when applying for lines of credit or business loans, most will ask you to provide company information showing that your business has been operating and profitable for at least three years. This is generally considered a trending period.
The following requirements tend to be common in the banking industry:
- Business Financial statements for the last three years prepared by a CPA, including:
- Balance Sheets
- Income Statements
- Cash Flow Statements
- Interim financial statements for the current year’s operation
- Bank account history
- A detailed list of business debt (maybe in the form of a schedule
- The last three years of business tax returns
- Annual budgets
- A professionally prepared business plan
- Evidence of a strong business credit history
- Current on tax liabilities
- An abundance of collateral (such as real estate, equipment, inventory, accounts receivable, or cash) to secure financing.
Also, business partners, members, or owners with more than 20% ownership may be required to:
- Provide personal tax returns for the last three years
- Prove she/he has no delinquent tax liabilities
- Provide a personal financial statement including a detail of assets and liabilities
- Provide personal guarantees to secure the loan or line of credit
- Have a personal credit score above 700.
In addition to the minimum requirements listed above, many banks will have restrictions on specific industries and loan types.