Business loan eligibility and documents required

Securing a business loan can be a strategic move to accelerate growth, fund small or large projects, or optimise your cash flow.

However, it’s essential to understand the eligibility criteria and prepare the required documentation. This guide outlines what lenders typically look for and what documents you’ll need to have ready.

Eligibility Criteria

Lenders assess several factors to determine your business’s creditworthiness and ability to repay the loan. Key criteria include:

  • Business Age: Lenders prefer businesses that have been operating for a while, as this demonstrates stability and reduces risk3. Younger companies or startups may find it more challenging to get a loan unless they seek lenders specializing in startup finance.
  • Credit Scoring: A good credit score is crucial as it indicates financial stability and reliability4. Lenders will review both your personal and business credit scores5. Building and maintaining a good credit score is essential when considering a business loan.
  • Revenue and Net Operating Income: Lenders want to see that your business has enough income to comfortably make loan repayments6…. Net Operating Income (NOI) is a figure calculated based on total income minus operating expenses. Many lenders expect a total income that is at least 1.25 times your operating expenses.
  • Business Sector: Some industries are considered more profitable and less risky than others5. Lenders may be more inclined to approve loans for businesses in sectors with a higher likelihood of success.
  • Company Assets and Asset-Based Finance: If your business has valuable assets like property, vehicles, or equipment, you can use them as collateral to secure the loan4…. Secured loans offer the lender security and may come with better terms than unsecured loans.
  • Personal Guarantee: Lenders may require a personal guarantee, especially if the business has no property or assets4. This is an agreement where a business owner or director accepts personal liability for repaying the loan if the business cannot.
  • Demonstrate Financial Stability: Consistent revenue and profit growth show lenders that your business can manage repayments8. Maintaining stable cash flow, avoiding large fluctuations in income, and preparing up-to-date financial statements are essential.

Essential Documents for a Business Loan Application

Preparing the necessary documents in advance can streamline the application process. Here’s a list of documents we recommend you have ready:

Financial Documents:

  • Income Statement: Shows the business’s revenue, expenses, and net profit over a specific period9.
  • Balance Sheet: A snapshot of your business’s financial health, including assets, liabilities, and equity9.
  • Cash Flow Statement: Reveals the business’s inflows and outflows of cash9.
  • Tax Returns: Corporate and personal tax returns provide valuable insights into your financial history.
  • Profit and Loss Projections: Forecasts of your future income and expenses.

 

Business Plans:

  • Business Plan: A detailed outline of your business, including its mission, goals, market analysis, and financial projections.
  • Executive Summary: A concise overview of your business plan, typically one to two pages long.

 

Legal Documents:

  • Articles of Incorporation or Partnership Agreement: These documents establish your business’s legal structure.
  • Operating Agreement: For limited liability companies (LLCs), this agreement outlines the rights and responsibilities of members.
  • Permits and Licenses: Any necessary permits or licenses required for your business operations.

 

Additional Information:

  • Company accounts, including profit-and-loss sheets and balance sheets for the past two years,
  • Personal asset details, including credit score, bank account statements, credit card statements, mortgage, and home finance information,
  • Project plan to show your commitment to your purchase, its planning, and how you will derive value from the loan.
  • Life insurance for you and other directors and business partners.

Summary

Understanding these eligibility criteria and preparing the necessary documents will ensure Lenders see you as serious, credible and avoid delays. In addition, some lenders may request access to your online bank accounts and accounting system to validate your situation.

Facing Challenges?

Contact us to discuss how to streamline generating these documents. We have expertise in finance systems and reporting. Having efficient operations to generate the reports on-demand is a great place to be to plan ahead and take advantage of financing solutions as circystamces change.