Bank Loan Requirements: What Do Banks Require for a Business Loan?

Bank Loan Requirements: What Do Banks Require for a Business Loan?

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As a small business owner, you can apply for a business loan from several different sources, including banks, credit unions, commercial lenders and peer-to-peer lenders. Banks are favored because they typically offer the lowest interest rates, but they also have the highest underwriting standards. To successfully apply for a business bank loan, you'll have to cough up a substantial trove of information about your business and yourself.

Business and Financial Information Required

Be prepared to share the following business-related items with the bank loan officer.

Bank statements: The last 12 months' worth, or more, of your business's bank statements, showing all transactions and balances on your business checking and savings accounts.

Business credit report: The bank will check your business's credit report, which discloses its credit history, credit score and likelihood to pay bills on time.

Business plan: A well-thought-out business plan will contain information describing your products and services, your competition, your sales and marketing plans, company management and financial data, organizational structure and an executive summary.

Business tax returns: If you file a separate business tax return, you'll be asked to provide the most recent two returns. You will also need to provide any information on outstanding tax liens.

Collateral: A description and proof of ownership of business property you will pledge as collateral to secure the loan. The bank will seize the collateral if you fail to repay the loan.

Financial reports: The bank will want to see up to two years' worth of the following.

  • Balance sheets: A statement at a given point in time of what your company owns (assets), what it owes (liabilities) and your stake in the business (owner's equity).
  • Business debt schedule: If your business owes money, the debt schedule lays out the outstanding balances and monthly payments of principal and interest.
  • Cash-flow statements: Shows how cash was generated or used during a given period for operations, investments and financing.
  • Income statements: Reports income and expenses for a given period.

Accounts receivable and payable: This includes information on sales and payment history of your customers, aging of accounts and a list of trade references.

Insurance information: A bank may require you to have certain types of business insurance in order to get a loan. You’ll need to provide proof of these policies.

Legal documents: These might include your articles of incorporation, franchise agreements, business licenses and permits and copies of contracts with third parties. You'll also need to furnish your Tax Identification Number if you have one.

Loan application form: The starting place for loans, the application form elicits information about your business, including how long it has been operating, your annual revenues, and how much you want to borrow and how you plan to use the loan.

State business certificate: Your state should have issued you a business certificate if you are a partnership, limited liability company or corporation.

Personal Information Required

As the business owner, the bank will want to verify you are a responsible and creditworthy individual. Be prepared to submit the following.

Personal bank statements: The last 12 months' worth, or more, of your personal bank statements, showing all transactions and balances on your personal checking and savings accounts.

Personal collateral: Many banks require you to pledge personal assets, such as your home and cars, to collateralize the loan. The bank will seize the collateral if you fail to repay the loan.

Personal credit report: The bank will want to know your FICO scores and credit histories from one or more of the major credit bureaus (Equifax, Experian and TransUnion).

Personal financial statement: Describes your personal assets and liabilities. Assets include your cash savings, bank account balances, investments, property (home and cars), and retirement account balances. Liabilities include credit card debt, mortgages, car loans, personal loans, monthly rent, unpaid taxes, child support/alimony requirements, any liens on personal property, garnishments, outstanding court judgements and student loans. Your net wealth equals your assets minus your liabilities, and the bank might have a minimum requirement for this amount.

Personal income tax returns: Two years' worth. Include any information about impending IRS audits, back taxes due or liens.

Personal information: Where you currently and previously lived and worked, your income from all sources, educational level, criminal record, and other data.

Large banks typically have the most stringent underwriting standards and tend to favor loan candidates that are bigger businesses. However, you might get better access to credit and better loan terms from a regional or local bank or credit union.

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.