10 Bank Loan Requirements You Must Be Prepared For (And Why)
There are times when every small business could use additional funding, whether it’s for inventory purchasing, equipment financing, or just extra cash flow to cover operating costs.
Without a little extra help in the form of a business loan, you may be unable to pay your vendors, purchase new merchandise, handle any existing debt, or any of the other necessary costs that come with running a small business.
While submitting a business loan application isn’t difficult, you will need to meet specific lender requirements to qualify for a loan. In some cases, small business owners may have difficulty meeting a lender's bank loan requirements or getting through the process quickly enough to secure the funding they need for immediate concerns like debt payments.
Keep reading for a look at what you can do to make this process quicker and easier and the steps you can take to make loan approval more likely. Knowing what requirements a bank has for approving a business loan can help you make sure you’ll meet each one. Doing so not only increases your odds of loan approval but can get you a lower interest rate, better repayment terms, and a higher loan amount.
Ten Important Bank Loan Requirements to Be Aware Of
1. Stating the Purpose of the Loan
While some lenders don’t place restrictions on how the funds from a small business loan can be spent, most will at least want to know how you plan to use the financing for your business.
Some lenders may be more hesitant to approve a loan if you’re refinancing existing debt with a higher interest rate. Other lenders, like SBA-preferred institutions, have to work within the guidelines set forth by the Small Business Administration.
For many SBA loans, you’ll have to provide proof that you’ll use the funding on approved expenditures.
Most banks are more likely to approve a loan for the following stated purposes:
- Improve Cash Flow
- Purchase Equipment
- Pay for Expansion Projects
- Purchase Inventory
- Payroll Expenses
If your reasons for seeking a business loan don’t align with commonly approved purposes, you may still be approved for a loan, but you’ll likely have higher interest rates with higher monthly payments and a shorter loan repayment term.
In some cases, you may be better off applying for financing from an alternative or online lender. Loans available through online banking typically don’t have the same kind of usage restrictions, so you’ll be able to use your business financing however you see fit.
2. Your Business Experience
When reviewing your loan application, banks will consider your background, expertise and how much experience you have in the type of business you’re running. If you’ve owned the same business for years and have managed your company’s finances responsibly, this will be reflected in your credit history.
Just as when considering an application for a personal loan, a bank will carefully examine a business’s credit report to ensure they have a history of timely debt payments, reasonable business credit card debt, and a good credit score.
If you’re a new or startup business, you may have some challenges getting approved for business loans. You may also face smaller loan amounts, higher interest rates, and additional fees. Your odds can be improved if you can demonstrate a great deal of experience in the kind of business you’re running, for instance, if you managed a similar type of business in the past.
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 your business will succeed and you won’t be able to meet your monthly payment requirements on time and in full, you’re unlikely to get approved.
3. A Good Business Plan
When applying for a bank loan, you may need to submit your business plan. A good business plan is important for every business, so if you don’t already have one, it would be best to draw one up before applying for business funding. Your business plan can also help your lender determine what kind of loan to provide, the loan term, the percentage interest above the prime rate they’ll charge for the loan, and other important details.
Before submitting your business plan, make sure that it accurately reflects your business’s finances, goals, and other relevant information. Reviewing your business plan with a financial advisor can be beneficial. A qualified professional who’s familiar with your kind of business and the kind of loans you may be eligible for will be able to provide valuable feedback.
4. Your Credit History
When considering your business for a loan, a bank will conduct a routine credit check. What you may not be aware of is that a bank may also require personal information like your social security number and personal as well as business tax returns, and you may review your personal credit history for recent personal loan applications or debt consolidations.
Any of these could indicate you’re having trouble managing your finances or that your business or personal expenditures are greater than you can afford. If this is the case, a lender will consider you a poor candidate for a loan, and approval is unlikely.
Personal credit history especially matters for companies that operate as sole proprietors or partnerships. In either case, the business owner is exposed to certain legal liability risks and assumes partial or complete financial responsibility for any debts their business may incur.
Before applying for a business loan, make sure that you know both your personal and business credit scores and get copies of your credit reports. If your scores are below the minimum requirements or your personal or business credit history is less than stellar, it may be best to take steps to correct any issues before applying.
You can obtain both personal and business credit reports from Equifax, Experian, and TransUnion. You can get a more detailed Business Information Report from Dun & Bradstreet, but it’s important to note they do charge a fee for this service.
If you don’t have good credit, you may not meet the lender’s credit requirements, and are unlikely to be approved for a loan. In some cases, you may qualify for a business loan of a lesser amount, typically at higher interest rates.
If you or your business has bad credit or have recently failed credit approval at another lender, you may be better off pursuing other business financing options from lenders who specialize in borrowers with your profile. Some lenders specifically provide bad credit business loans or are more open to working with business owners that might not have an excellent score.
5. Other 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:
- Addresses
- Criminal record
- Information on your education
- Tax returns
- Financial statements
- Assets
- Personal loan balance
They may also inquire about your mortgage or rent, and whether you’ve recently taken out a home equity loan or home equity line of credit, as these could negatively impact your creditworthiness.
6. Financial Statements
In addition to personal financial information, you’ll also need to submit your business’s financial statements. The number of statements will vary depending on the bank you’re applying to and their requirements.
Most banks will require the following documents:
- A balance sheet
- Accounts receivables
- Profit and loss statements
- Cash flow statements
- Income statements
- Business bank account balances
- Other financial projections
Once submitted, the bank will analyze these documents to determine whether you are a strong loan candidate.
7. Collateral
Even if your business or personal credit history falls below bank loan requirements, you could still receive financing by submitting collateral. Unlike an unsecured loan, secured loans require collateral such 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. Banks typically seek structural collateral for larger loans, 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.
If you’re taking out a loan for a specific type of equipment or inventory, that object may be considered collateral. For example, if you’re taking out an auto loan, you could use the automobile as collateral if you can’t repay your loan.
8. Cash Flow
When evaluating applications, banks’ primary financial concern involves business cash flow. Does your business generate enough cash flow to repay a bank loan on time? The bank will ask you to present information about your primary business cash sources to determine this. Most banks understand that managing cash flow is a common challenge for business owners, especially entrepreneurs that own seasonal businesses.
9. Information on Outstanding Loans and Other Debts
Many business owners apply for a small business loan before paying off their outstanding loans and other business debts, such as their credit card balance. Although the need for additional financing is understandable, applying for another loan can hurt your credit in many cases.
In addition to your debts, you’ll also need to maintain your business, which probably includes:
- Rent payments
- Inventory orders
- Payroll
- Other ongoing costs
Understandably, lenders don’t want to take on clients with outstanding debt because they likely won’t be able to repay their balance in their set loan term. Due to this, you might not qualify if you have a loan balance that you still need to finish paying.
10. A Personal Guarantee
If you’ve applied for a personal loan, the lender may have asked you to sign a personal guarantee. In some cases, you may need to sign this document to secure a small business loan from a bank.
This document is a written promise stating that you, as the business owner, will repay your small business loan using your personal assets if your business can’t pay its loan balance.
The bank may require you to pledge specific assets for additional security in some cases. These collateral assets may include your personal finances, home, or investment accounts.
Next Steps: Consider Your Business Financing Options
To receive a bank loan approval, the small business loan requirements you must meet might appear intimidating. However, with careful planning, your small business may be able to obtain financing successfully.
If you don’t want to go through the tedious bank loan application process, it might be good to apply for a business loan from an alternative lender. You can still receive the business financing you need but won’t go through a long, complicated application process.
Editor’s Note: This post was updated for accuracy and comprehensiveness in March 2024.
Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.
