There are many different types of business loans. Some are more traditional—like ‘term’ loans—while others, like equipment financing, maybe new to you. Either way, if you are going to apply for a loan, there is going to be some physical or digital paperwork involved. As a business owner, it is important you know what to expect when taking out a business loan as you may need the money fast, and you wouldn’t want to delay things by being unprepared. With that in mind, here are the documents you’ll need before applying for a business loan.
Types of Loans
But first, let’s briefly outline some of the most common types of small business loans and financing, as each has slightly different requirements:
- Term Loans: A ‘term’ business loan is what you might think of as a traditional loan. This is where a business owner applies for a fixed amount of money that he will receive in one lump sum and then pay back on a monthly basis via a fixed amount of money she agrees to at the time of the contract. Term loans are great for some types of expenses and less than ideal for others. One thing to remember about term loans is their repayment process operates total independently of your business’s success. What that means, for example, is if your business has a bad month, you still have to pay the same amount toward your term loan as you would if it had a good month. The amount is “fixed.” Keep in mind that term business loans often require a thorough examination of your business’s finances as well as your personal credit history.
- Business Line of Credit: A business line of credit is a flexible type of business financing that, unlike a traditional business loan, can be repeatedly used. Most business lines of credit are between 6-months and two years and require less in terms of credit scores in order to qualify.
- SBA Loan: SBA business loans are built specifically for entrepreneurs and owners of small businesses. Unfortunately, for many small business owners, large banks often do not want to take the risk of working with them. Large commercial banks would much rather lend to more established corporations who take out large sums of money that they can spend years paying back. Small businesses, on the other hand, generally apply for less money and also present more risk as many of them fail within only the first few years. This is where the Small Business Administration (SBA) comes in. The SBA can ‘guarantee’ certain small business loans. This means that, if your company fails and you cannot pay your lender back for their small business loan, the SBA will take care of it. You can back virtually any kind of loan with an SBA guarantee’ and, by doing so, greatly improve your chances of approval. In addition to being great for a new business owner, SBA loans are also ideal if you have bad credit or no credit.
- Equipment Financing: As the name suggests, equipment financing is specifically built for buying equipment. This type of financing requires less credit than a term loan but has great restrictions, as equipment financing loans can only be used for buying or repairing equipment or machinery. Equipment financing generally requires less credit than a traditional term business loan.
- Merchant Cash Advance: While not technically a business loan, a Merchant Cash Advance is an important type of financing that is open to small business owners. Rather than taking out a fixed amount of money, with a Merchant Cash Advance, you actually “sell” your future credit card sales to a financing company for a lump sum. In exchange for your future sales the financing company takes a small fee. While a merchant cash advance usually does require at least some credit, whether or not you qualify is mostly dependent on the length of time your business has been operated plus your business’s monthly revenue.
- Short-Term Loan: Startup owners and small business owners with bad credit often have to resort to taking out short-term business loans rather than more traditional, term-loans. The reason for this is that many new companies do not meet the standards required to qualify for a traditional, long-term business loan. Short-term business loans have their pros and cons. The good thing about short-term loans is you can pay them off quickly (usually in just a couple weeks or months), and they do not require as much credit as traditional loans. The negative aspects of short-term loans include the fact that they have high-interest rates and larger monthly payments. On the plus side, short-term business loans generally do not require you to have as good of credit as a traditional term loan.
- Debt Consolidation: Debt consolidation is a very common type of business loan. Depending on what type of business you are in, you can apply for a debt consolidation loan to either reduce your total monthly payments and or to organize multiple business loans all under one “roof,” as sometimes it can be quite difficult keeping payments organized when they are going to several lenders all at once.
- Commercial Mortgage: Commercial mortgages are long-term business loans that typically extend 15 or 30 years. Commercial mortgages are used to buy office space and other types of commercial or investment real estate.
- Home Equity Line of Credit: A home equity line of credit can be used for either personal or business capital. Basically, a home equity line of credit leverages the equity you have built up via your mortgage as a source of credit that you can use toward personal or business expenses.
Documents You Will Need
While different types of business loans require different paperwork, if you want to prepare for anything, you should bring the following
- Personal Resume
- Business Plan
- Business Credit Report
- Personal Credit Report
- Business Tax Returns
- Personal Tax Returns
- Financial Statements
- Accounts Receivable and Accounts Payable
- Legal Documents
Personal Resume for Business Loan
You may not think your personal resume and history matters when it comes to getting approved for a loan, but in some cases it does. If you are going for a traditional term business loan with a commercial bank, they may well ask you for your personal resume, history, or maybe even references before approving you. They do this to ensure your reliability. Even if the lender you are working with does not end up asking for your resume, it’s always a good idea to have a professional, polished resume ready and on-hand, just-in-case.
Business Plan
If you have a business or are in the process of launching a startup, you should have a fully prepared and fleshed out business plan. While writing business plans have, among some groups, fallen out of favor, the banking and lending world is still very much interested in seeing your company’s plans before making any commitments to giving you money. Business plans are time-consuming, so it’s important to realize that you are not just creating yours for the sole purpose of your potential lender, but also as a useful exercise in thinking about deep problems as they relate to your business and its future.
Business Credit Report for Business Loan
Naturally, if a bank or other financial institution is going to lend your company money, they are going to be interested in its credit. If your business has a bad history of missing or late payments, or you already have large amounts of debt, it can seriously hurt your chances of getting approved for a term loan. However, there are still options. If, for example, you have at least decent credit and are certain you will be able to pay your business loan off quickly, you can consider a short-term business loan.
Or, if your business does not have good credit but has great cash flow, you can consider an option like a Merchant Cash Advance or even invoice factoring.
Personal Credit Report
Some lending institutions may be interested in seeing your personal credit report. When applying for certain types of business loans, your personal credit can either help or hurt you, depending on how good it is. Having great personal credit can be a valuable asset. Poor personal credit, on the other hand, can potentially lower your chances of getting a traditional term loan from a commercial bank, but it won’t make as much of a difference with some of the other types of alternative business loans.
Financial Statements
Many types of business loans require that any company owner with a 20% stake or more in the company provide a personal financing statement—this is something you should prepare for and discuss with your partners or investors (if you have them).
Beyond personal financing statements, if your business is established, you will also need to provide:
- Your Balance Sheet
- Statements from Your Bank
- Information on Your Cash Flow
- Detailed Income Statements
It is a good idea to have all of these documents on hand in either physical or digital form. This is especially critical if you need your loan to go through quickly. Sometimes, when time is critical, a traditional term business loan may not be the best option, as they require the most paperwork and can take longer to get approved and funded than other types of financing. For instance, Merchant Cash Advances and short-term business loans can get approved and funded in as little as a day.
What type of loan you should opt for depends entirely on your goals, needs, and qualifications. This is also true of what lender you should approach. If your credit is bad, you are unlikely to qualify at a large commercial bank, but you may well qualify for several types of financing at another, a smaller or online lending institution. Realize there are options and that it is worth looking around when applying for a business loan.
Legal Documents
For several types of business loans, you will need to provide copies of your company’s legal documents. These may include the following:
- Your Business’s Articles of Incorporation: Ideally, you will have a copy of these documents both in physical and digital form as they are important not only for applying for business loans but also in many other situations.
- Whatever Business Licenses or Registrations Your Company Needs to Operate: These documents vary greatly between businesses. Some small businesses, like restaurants and bars, require all kinds of licenses, while others, like e-commerce companies, may require less. You should bring copies of whatever essential licenses or registrations are associated with your company.
- Commercial Leases: If your company owns commercial property, you should bring a copy of your lease and or commercial mortgage along with you as this may factor into the lending institution’s decision.
- Third-Part Contracts: If your company has important third-party contracts that impact its bottom line, you should bring them along.
- Franchise Agreements: If your small business is a franchise, you will need to bring copies of its franchise agreements.
- Organization Documents: Beyond your articles of incorporation, you should also bring copies of any other key organizational documents relating to the operations or administration of your company.
Accounts Receivable and Accounts Payable for Business Loan
Finally, you will need to bring along detailed information on your company’s accounts payable and accounts receivable in order to qualify for certain kinds of business loans.
Accounts Receivable and accounts payable documentation will give your potential lender a clearer idea of the true nature of your business’s cash flow in terms of how much money you are making versus how much you are spending. This will help your lender determine your business’s overall financial position.
Conclusion
There you have it, all of the documents you need for each of the most popular types of business loans. Regardless of the one you choose, the main thing is to be prepared and ready for anything your lending institution might need from you. If you need your application decision and funding fast, it is important to have as many critical documents available as possible.