A Small Business Loan applicant is expected to do his/her homework before approaching a lender or bank for the loan. Post the Great Recession, banks and financial institutions have adopted a stringent verification process for approving loans. While big businesses have both the exposure and experience with respect to seeking loans, it is imperative for small businesses to prepare themselves well and avoid common mistakes that can cost them a rejection.
Here is a summary of documents that should accompany Small Business Loan Application.
- Background Information – A startup entrepreneur is required to give detailed information about his/her experience with managing a business. If an entrepreneur does not have prior business experience, then it is expected out of them to show evidence of strong managerial accomplishments at an organisation, where they might be employed.
- Credit Score – This information is vital for the lenders and an entrepreneur cannot risk submitting an application without it. A personal credit score in between 700-800 is often considered as an optimum by the lenders. Unless the business is a startup, an entity will have to submit business credit score additionally. A score of 80 and above is regarded as the good business score.
- Collateral Documents – An entrepreneur has to place an asset or property as collateral for seeking a loan. The business owner should submit all the related documents having clear title to the lender. It should be made sure that the asset is free from encumbrance.
- Income Tax Returns – A startup owner will be needed to furnish income tax returns for the last three years. If an entrepreneur operates any other business, then income tax returns of the business will also be required.
- Financial Statements – Lenders demand projected monthly or quarterly financial statements of business for the first year. They will also require quarterly or years projections for the next four years. Such projected statements should be accompanied by bank statements, both personal and business, for one year. The bank statements help lenders to verify the authenticity of projections.
- Business Plan – A small business might not be required to submit a business plan but having one would mean that the entrepreneur is serious about the business and would invoke a sense of responsibility in eyes of lenders.
Generally banks are reluctant to lend small businesses money and that is why there has been an enormous influx of alternative lending options penetrating the market. Some of the alternative lending methods include cash advances, working capital, payday loans and other loan instruments which enable small business to get access to capital but at much higher interest rates. It is imperative for small business owners to do their due diligence prior to engaging with an alternative lender. The lack of regulation in this business allows lenders to charge extremely high interest rates that in many cases the businesses simply can not pay back.