What Are the Basic Requirements of a Small Business Loan?
Understanding what a lender looks at in a small business loan application is an important factor to increase your odds of approval. Lenders of any type operate under a risk versus reward formula. Basically, those who are riskier bets have to pay more in fees and interest on the loan, which rewards the lender who takes a chance on the borrower. This is why some loans have really low interest rates – the borrowers either have phenomenal credit or they pledged a tremendous amount of assets to secure the loan. Either way, loans of these types are less common than one would believe.
Some lenders who specialize in bad credit business loans can offer cash to the borrower, but at ridiculously inflated interest rates. They don’t require much in terms of documentation. The interest rates are high to mitigate the risk of giving cash to a borrower who has not demonstrated good judgment in the past regarding money choices. Lastly, asset based or factor lenders understand that there has to be a middle ground. These loans are designed for the majority of borrowers and have unique requirements in themselves.
All Lenders Need Some Business Records
Traditional banks need substantial, and sometimes invasive, documentation for a loan approval. Payday lenders need little. Asset-based or factor lenders need only a modest amount of information. It is a best practice to gather at least three month’s worth of bank statements to show how the business manages money into and out of the organization. If credit cards are accepted, three month’s worth of merchant statements is documentation that can help paint a picture around daily sales amounts. Information like business licenses, profit and loss statements, and inventory figures are great to have handy, though all lenders might not need them.
Paint a Picture and Help the Lender See the Big Picture
An important factor to consider in terms of small business requirements is the business plan. It is important to provide your prospective lender with a business plan for your company so you can show how your company has the ability to pay the loan back. This helps make you appear less risky, which might provide better loan terms.
Credit Isn’t Everything
You and your business are much more than a credit score. You are the past business performance as verified by financial documents, and the future potential as indicated by your receivables and future business plans. Lenders typically want to offer business loans to those with good credit and significant assets. With bank and credit union loans this is almost always the case. Payday lenders don’t really care, and asset-based or factor lenders are more interested in the future potential of the business versus a raw credit score. This is an area where your documentation and business plan can help if your credit score is low.
There are a variety of guidelines and regulations governing the approval or denial of all loans. The idea is to understand the type of loan you need and can qualify for, and prepare the documentation and business plan to increase your chances of approval.