What Documents Do You Need to Apply for a Small Business Loan Online?

In this article:

  • Short-term benefits of business loans
  • Long-term benefits of business loans
  • Documents required for a small business loan application
  • Finding a lender

There are many benefits to taking out a small business loan. But the application process isn’t always a breeze. It requires a lot of information and documentation, and many entrepreneurs and business owners get stuck halfway through their application because they don’t have the right documents on hand. The result? Delays in getting financing, and sometimes worse!

Thankfully, it’s not that hard if you know what you’re doing. This article will cover the basic paperwork you need to get a business loan.

Why do you need a business loan?

Loans can be intimidating because some entrepreneurs fear taking on too much debt. Most business owners know that using a small business loan has immediate benefits, like having the capital to get started or expand operations. However, when properly planned, the right loan amount can help your business today and in the future. 

Short-term benefits

A business loan can help your small business get fast funding when you need it, which can help:

  • Fund payroll
  • Purchase inventory
  • Supplement cash flow
  • Purchase equipment or real estate
  • Ramp up marketing efforts
  • Expand
  • Cover operational expenses
  • Consolidate debt

Long-term benefits

A small business loan can help secure future financial stability in the following ways:

  • Improve the creditworthiness of the business
  • Stabilize cash flow fluctuations
  • Tax deductions
  • Eliminate high-interest debt
  • Retain ownership
  • Growth opportunities

What documents are needed for a small business loan application?

Once you’ve decided that a small business loan is the right decision for you, you’ll want to get through the application and approval processes as fast as possible. Preparation is key when time and money are on the line.

Each lender and type of loan will have different document requirements for qualifying loan applicants, however, there are some industry-standard documents you may want to gather ahead of time.

Credit reports

Lenders determine the loan eligibility of your business based on many factors, including the business’ credit, or FICO, score. Before reaching out to a lender and applying for a loan, it’s a smart move to know your business credit scores. While the lender will likely run their own credit report with one or more of the major credit bureaus, you can check your business credit report for free. Having a copy of the credit report can speed up the process of selecting the right lender and the right type of business loan for you.

Startup business owners and some small business owners in their first two years of operations may not have established business credit history or might even have bad credit. That does not mean you will not qualify for a loan. Lenders may choose to use your personal credit score in addition to, or in place of, the business credit score. Before applying for a business loan, get a free copy of your personal credit report too.

Bank statements

Lenders may request copies of statements for your business checking account. Underwriters will use your account information to verify the age of the business, which is why it is imperative that new business owners open a business bank account as soon as possible. The bank statements will also let the lender confirm that the deposits and withdrawals are in line with the business’ revenues and expenses.

Don’t worry, you probably don’t need to have paper copies of the statements for any extended length of time. You may want to have 1-3 months’ worth of statements on hand, but lenders may prefer to electronically link to your bank account with your permission. This will allow them to verify your reported information and confirm that the bank account information is correct so there will be no delays when it’s time to get funded.

Income tax returns

Lenders may ask for two years of your business’ income tax returns. The tax returns give the necessary information that lenders use to make a credit decision about your small business. When reviewing the returns, lenders will focus on income, business assets, and operational expenses. The tax returns will also confirm the tax identification number for your business and that the income is sufficient to handle the new loan payments.

Some loan applications will also require copies of your personal income tax returns. For new businesses, the lenders may use a combination of the business’s income and your personal finances. In some cases, borrowers opt for a secured loan and need to provide a personal guarantee for their small business loan. In those cases, your income tax returns can be used to support your personal assets. If you don’t have a copy of your business or personal tax returns, you can request a copy through the IRS.

Debt schedule

Be prepared to provide your lender with a schedule of any other debt the business has. This may include commercial real estate loans, equipment loans, lines of credit, and business credit cards. While the lender will be able to access most of this information with your credit report, the schedule allows them to have a snapshot of your short-term and long-term obligations.

Understanding your business debt-to-income ratio (DTI) will help you expedite the application process. Lenders calculate the DTI to evaluate a business owner’s ability to make monthly payments. A low DTI indicates that the company is making enough money to cover its obligations and is preferred by lenders. A very high debt balance without a substantiating income will indicate a high DTI. Although a high DTI won’t disqualify you from getting a business loan, it may require additional documentation, a down payment, or collateral.

Collateral documentation

Collateral is an asset held by the lender to ensure the loan is repaid. If a borrower defaults on their loan, ownership of the asset is transferred to the lending company. Loans that require collateral are secured loans and are not uncommon for small businesses.  For example, term loans often use real estate as collateral, where the lender holds the title to the asset for the duration of the repayment terms.

Collateral is not always real estate. Equipment financing uses the purchased equipment to secure the loan so that the loan term becomes the useful life of the equipment. There are also financing options for small businesses that may not have or need to purchase large assets. Merchant cash advances (MCA) use future credit card sales as collateral and invoice financing and invoice factoring fund borrowers and use unpaid invoices as collateral.

Financial statements

Some lenders will request copies of your business’s financial statements including a balance sheet and income statement. The balance sheet shows the lender what your small business owns (assets) and what they owe (liabilities). The income statement, or profit and loss statement (P&L), shows what a business makes (annual revenue) and what it spends (expenses), These statements help a lender get a big picture of whether your business can sustain a new loan.

AR and AP reports

Accounts receivable (AR) reports give detail about what money is collected by the business. AR detail shows the lender what products or services have been sold to customers and what money has been collected on those transactions. AR detail is required with the following funding options:

  • Invoice factoring – the business sells its unpaid invoices to an invoice factoring agent, who then collects the unpaid balances
  • Invoice financing – the business secures a line of credit with unpaid invoices

Accounts payable (AP) reports give a detailed ledger of money the business is paying out and what money is still owed on goods and services the business has received. The AP report can show that a small business pays its vendors on time.

Business plan

A business plan is a formal document that explains the purpose of your business. It gives an overview of key personnel, goals, marketing, operations, finances, and the competition. A successful business plan is frequently reviewed and updated, as it serves as a guide to executives and key staff members. A business plan is a great planning tool for all businesses, but if you don’t have one for your business, consider writing a business plan before applying for a business loan.

Lenders and investors often want to see a business plan. While it is not a requirement for all loans, some loans, like SBA loans, backed by the U.S. Small Business Administration, require a documented business plan before considering applicants. The document shows the lender, or other interested parties, that the business model makes sense, has realistic goals and has detailed the actions it will take to succeed.

Business licenses

Small businesses in certain industries require business licenses to operate. Licenses and permits may be required at the local, state, and federal levels. Local licenses may include zoning permits and operating licenses, while federal regulations may require liquor licenses for bars and convenience stores.

Lenders will want to make sure your business is complying with all local, state, and federal regulations before considering your loan application. Check to make sure you have the proper business licenses and that they are not expired before working with a lender for business financing.

Finding a lender

Many types of business loans are available through traditional lenders, like banks and credit unions. These lenders often have brick and mortar locations you can visit to begin your loan application process. Traditional lenders usually require more paperwork and a longer wait time during the approval process but can sometimes offer lower interest rates on bank loans. Traditional lenders are commonly sought out by borrowers looking for secured and unsecured term loans, SBA microloans, business lines of credit, and business credit cards.

Alternative lenders, like Biz2Credit and other online lenders, also offer small business loan programs. These lenders are attractive because they offer a fast application process that can be done entirely online. Required documents are uploaded during the application and decisions can be granted in as little as 24 hours. Alternative lenders work with multiple financial institutions at once, so they can offer multiple loan options and competitive annual percentage rates (APR). Some loans commonly approved through online lenders include commercial term loans, SBA 7(a) loans, short-term business loans, equipment loans, invoice financing, and working capital loans.

Final thoughts

Small business loans provide opportunities to entrepreneurs and established business owners. They can help you finance operational expenses, a shortage in cash flow, or open a new location. Business loans also have a long-lasting, positive impact on the creditworthiness of your small business.

The best way to know what documents you will need for a loan application is to speak with a lender, but there are some standard documents you can gather in advance including:

  • Credit reports and bank statements
  • Income tax returns and financial reports
  • Documentation about current debt and potential collateral
  • Business plan and business licenses

Working with an alternative lender is one way to make the loan application process as fast and as smooth as possible. Just ask Jyoti Sharma, who had dreams of opening an Ayurvedic day spa. Ms. Sharma received loan approval from a traditional bank, but they told her it would take 2–3 months to be funded. Having already secured her location, Ms. Sharma turned to Biz2Credit and was able to get approved for a business line of credit that would be funded in a few business days.

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