Business Loan Application Checklist What Lenders Really Look For

When you apply for a consumer loan like credit card or an auto loan, you are likely aware that most of the lenders will be reviewing your credit score and your income, to determine of they can approve you for the same. Although the method is quite the same, when it comes to small business loans, it is more complicated.

There are many different types of loans available, like business line of credit, SBA-backed, and term loans, but each of them has different approval criteria. In this article, you will learn what all lenders look for when you are applying for a business loan.

Revenues/Cash Flow

While applying for a business loan, you should know that most of the lenders would like to see the ability of your business to repay the amount borrowed. Depending on the type and size of the loan, you will be asked to submit multiple types of documents.

Suppose for a bank loan, you would likely have to show business tax returns for two years or more and at least three months of business bank statements.

Even when you apply for a business loan, there are online lenders who would not look at your financial statements; instead, they will analyze the activities of your bank, for making a quick credit decision. With this type of loan, the lenders usually ask for a business bank account statement for the past three to six months, which may require you to link your bank account.

Every lender is different, but there are a few things that they look for in common:

• Trends in balances and whether the business is experiencing decline or improvement
• Deposits, which include the monthly deposits and the amounts
• Undisclosed debt payments
• Low balance days, and how many days are there when the balance falls below a minimum amount, and the number of times there is withdraw from the account

Time in Business

While applying for a business loan, you should know that the years you have spent in your business are important. As lenders want to review the successful track record of your business.

Many lenders would also prefer to lend to businesses that has been operating from the past two years. So before applying for a business loan, make sure that you have an official start date for your business. This date can be the date you incorporated or on which you received your Employer Identification Number (EIN) or your business license. You should make sure that you are consistent with the dates and use the same while applying for a business loan.

It can be challenging to apply for start up business loan, as startups don’t have much to show for annual revenue generation. So you can look for particular loans that offer funds with low credit.

Credit History

Some small business lenders check business credit, some check personal credit, and a few don’t check credit at all. When applying for a business loan, your business credit report may be reviewed to assess your credit score, payment history, or to identify potential red flags, such as tax liens, late payments, or collections.

Lenders also check for UCC filings, which can show whether other creditors have a lien on your business assets. FICO SBSS score is a mix of business and personal credit, and is most often ordered when small business owners are applying for a business loan.

In all but the largest cases, personal credit is also screened. Such a screening might be a soft inquiry that will not have a significant impact on the score, but this is not always the case. It's worthwhile to ask for the lender's credit policy before applying for a business loan.

Banks, credit unions, and traditional lenders, SBA-backed lenders too—typically require good to excellent credit. Your credit score may also influence approval as well as the interest rate you are quoted. Whether you prefer a lump sum payment or flexible terms, understanding the credit requirements becomes critical when applying for a business loan.

Industry

There is a fourth factor which is important for you to consider when applying for a business loan. You should do in-depth research of the industry when you are going to start your business, as it may impact your loan option. Small business lenders may want to lend in some specific industries only, as they may feel lending in other industries can put them at risk.

These industries are referred to as restricted industries. For example, some lenders would specifically lend to medical and veterinary practices, but others won’t lend to businesses that are in real estate construction or any entertainment business.

Collateral

Some lenders would also like to see the collateral, so keep track of that before applying for a business loan. It will depend on the lender on what collateral you can use for securing a loan after filling out the business loan application. If you are taking a secured loan for a new business, it will include real estate, or business assets. So the more tangible your assets are to liquidate, the lower will be the risk associated with the lender to approve you for business financing.

What are the 5 C’s of Lending?

You must have heard about the five C’s of lending, which are used for describing the eligibility factors that lenders may look for which lending a loan amount, and during the underwriting procedure. Below are some questions which you may come across while applying for a business loan:

1. Character: Will you pay back the loan? When you apply for a business loan, lenders will review your credit record to evaluate how much you've paid back loans previously. A good credit record increases your likelihood of approval.
2. Capacity: Can you repay the loan? Lenders analyze your business's income and cash flow to determine whether you can repay. Financial ratios, such as the debt service coverage ratio, are often used similar to a debt-to-income ratio in consumer lending.
3. Collateral: What assets will collateralize the loan? When you apply for a business loan—especially short-term ones, lenders will sometimes request collateral in the form of real estate, inventory, equipment, or even future receivables to secure the loan.
4. Capital: How much of your own money do you have invested? That "skin in the game" matters. Whatever it's called -- down payment or equity injection -- lenders want to be sure that you're responsible for making your business succeed.
5. Conditions: What are loan terms and how do they affect repayment? The lender considers the interest rate, payment schedule (daily, weekly, or monthly), and the overall economic or industry climate. It is important to choose a competitive rate loan. If you're doing a business loan application online, you'll also be asked to submit a business plan to go along with your application.

Remember, even online loan applications will include an automated review for some of the factors mentioned above. Although a loan officer may not receive a credit report, there should still be a minimum credit score requirement.

Conclusion

Applying for a business loan is a savvy move to meet your business needs, whether launching a new venture or growing an existing one. Being aware of what the lenders are looking for, cash flow, credit report, company age, and collateral, can increase your odds of approval.

From covering everyday costs to securing long-term working capital, the right financing tool can take your business to the next level. Be prepared, conduct thorough research, and always align your loan application with your personal objectives. Applying online or at a bank, being prepared is crucial to getting financing that suits your business requirements.

FAQs about Business Loan Application

What are the 5 C's of business lending?

Lenders want assurance that their borrowers are safe and a safe place where they can invest their money. One way through which they can do this is by analyzing the 5 C’s, which are character, capacity, capital, condition, and collateral.

What do banks look for when applying for a small business loan?

Lenders and loan programs have different eligibility requirements. Generally, eligibility is based on a business's primary source of income, the nature of its ownership, and its location of operation. Typically, companies must meet SBA size standards, demonstrate the ability to repay, and have a sound business purpose.

What does a lender look for in reviewing a business plan?

Lenders want to know who you serve, the size of the population, and the viability of the market. Lenders also want to understand who your competitors are in this space and how you are distinguishing yourself.

What do lenders review before lending money to applicants?

Lenders may review the credit report, income statement, credit scores, and other relevant financial documents of the borrower. They also consider information related to the life of the loan. Each lender has their way of analyzing the creditworthiness of the borrower.

What disqualifies you from a small business loan?

There are several factors that can lead to the disqualification of small businesses from getting a loan after they have completed applying for a business loan. Some of the most common points are poor credit history, no solid business plan, and lack of collateral. There can be other reasons as well, like high debt, operating in a low-profit industry, risky industry, and low revenue.

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