What Do I Need for a Business Loan?
Bank loan requirements for business owners can be intimidating. In reality, however, the process is smoother than you’d realize. So long as you possess a few key documents, you can apply for a loan in less than an hour. Often, you’ll often get an answer in 48 hours or less.
So, if you’re asking, “What do I need for a business loan?”, you’ve come to the right place. Below, we’ll walk you through the process.
Banks vs Online Lenders
These days, two types of business loan companies exist – banks and private online lenders. Legacy financial institutions like JP Morgan Chase make up the first group, while firms like OnDeck are in the second.
What’s the difference between the two? The biggest differentiator lies in the types of loans they offer. For the most part, banks stick to secured loans, while their online competition deals mostly in unsecured loans.
The business loan requirements of secured loans revolve around collateral. Collateral is an asset that is greater in value than the requested loan. That way, if the borrower defaults, the bank can cover their losses by selling the collateral asset.
However, many would-be borrowers don’t possess significant assets. As a result, the private lending industry has grown significantly in recent years. Unlike banks, private lenders offer unsecured loans.
Rather than require collateral, these firms base their lending decisions on creditworthiness factors. They use FICO scores and other evaluation tools to determine (a) whether a lender is an acceptable credit risk, and (b) the terms of the loan.
Private online lenders offer borrowers a higher acceptance rate than the banks. There is a catch, though – often, these loans come with a higher interest rate. When borrowing from a bank, you can get average annual interest rates as low as 2%. With online lenders, these rates start at 7% per annum and can get as high as 100%.
Of course, the devil is in the details. Only a tiny minority gets a bank’s prime rates. In fact, most borrowers don’t even qualify for a bank loan. However, with a decent credit score, they can get a decent interest rate from an online lender.
What Do I Need for a Business Loan When Applying at a Bank?
Despite high rejection rates, meeting qualifications for business loan from a bank is worth the trouble. With per annum interest rates well below 10%, these products can save you thousands compared to private loans.
Acceptance isn’t just a question of numbers – to qualify for a bank loan, you’ll also need to present well. To give yourself the best chance of success, bring the following:
Proof of Sufficient Collateral
Generally, banks don’t do unsecured loans, as they’re far too risky to their bottom line. Before they loan a dime, they require the borrower to provide security in the form of collateral. Collateral is any asset a lender can easily liquidate. That way, if the loan goes bad, they can cover their position.
Examples of collateral include property, investment & bank accounts, and even accounts receivable.
Loan officers entertain borrowers of all kinds. Sadly, many lack a coherent business model. To protect themselves against amateurs, banks require you to submit a business plan.
Now, it’s true that business plans are often unnecessary. Nonetheless, banks are conservative institutions. So, once your enterprise grows to the point where you need a loan, get a plan drawn up.
Every Business Financial Detail You Can Find
Business plans are lovely, but let’s be honest – hard numbers prove whether you have a real business. Find every file, recipient, and statement that demonstrates a robust and consistent cash flow. Also, show the bank documentation that outlines ongoing expenses.
Examples of these documents include financial statements, credit card accounts, tax returns, and more.
Personal Financial Details
Ideally, a businesses’ financial affairs should be separate from those of its owner. It’s the reason why business bank accounts and corporate structures exist. Nevertheless, the personal financial health of company’s executives is a factor banks consider.
As such, you’ll have to supply detailed documentation of personal assets and liabilities. In some cases, you may need to sign a “personal guarantee”, which makes you personally responsible for paying back a business loan.
What Do I Need for an Unsecured Online Business Loan?
Unless you have significant assets, the banks will likely reject you. Bank loan requirements for business are tough for a reason – to protect their profits. That’s not the end of your story, though – there are dozens of online private lenders out there. These providers offer unsecured loans, which are easier to qualify for than their secured counterparts.
However, these businesses still have business loan requirements. To get it, you’ll have to provide sufficient documentation. If you’re looking at an online lender and asking, “what do I need for a business loan?”, this section will light the way.
Unsecured loans do not require collateral. Because of this, most unsecured lenders rely on credit scores to determine creditworthiness. Usually, you’ll need a good business credit score (670+). However, some lenders (like OnDeck) accept borrowers with a fair credit score.
As the unsecured credit industry evolves, lenders are finding novel ways to determine creditworthiness. Of them, business age is becoming an essential factor. The longer you’ve been around, the more likely it is you’ll qualify for a loan.
Business owners will find it tough to find unsecured financing in their first year. However, companies like Fundbox lend to businesses as young as two months old.
Like the banks, private lenders want to ensure you have a real business. They don’t require a business plan, but they’ll want to see cash flow figures.
For instance, BlueVine only lends to businesses that turnover at least $10,000 per month. If you’re making less than that, though, other providers have less stringent requirements.
The above requirements are the most common metrics used by private lenders. However, some companies use various other markers, like debt-to-credit ratio. For instance, firms like Lending Club look at your recent economic past. If they find bankruptcies or tax liens, they may turn down your application.
The Better Prepared You Are, The Better Your Chances of Success.
The banks used to be the world’s financial gatekeepers. In their day, the qualifications for business loan scared off many would-be business owners. No longer – thanks to private unsecured lenders, entrepreneurs like yourself have easier access to capital. Satisfy the business loan requirements mentioned above, and your odds of acceptance will be higher.