Securing a business loan is a big step for any entrepreneur. But before any lender hands over the money, they’ll want proof that you and your business are legitimate and capable of paying it back.
Businesses need loans all the time, especially the small ones. After all, survey data shows that 59 percent of small businesses in the US are in fair or poor financial condition. That being said, not all of these loans are approved. In fact, less than half of small business loan applications were approved in 2024’s third quarter.
In a lot of these cases, loan requests get rejected because lenders might find the loans to be risky. Lenders are naturally cautious because they’re taking a risk by giving you money. They need to know exactly who they’re lending to, what your business looks like financially, and how solid your repayment plan is.
Every document you show paints a picture of your business’s health and your credibility as a borrower. So, what exactly should you prepare?
Identity Documents
Before anything else, the lender needs to know you’re a real person. Seems obvious, right? But in the world of loans, especially business loans where large sums of money are involved, proving your identity is serious business.
Financial institutions won’t even start considering your application until they’ve confirmed who you are. They need to match your name to the person standing in front of them or sitting behind the screen if you’re applying online.
Besides, the US already has over $190.685 billion worth of non-performing loans as of December 2024. Lenders will not want to lend to people who are part of this statistic and are already defaulting on their loans. Hence, these lenders or banks are super cautious about the people they are lending to.
Most lenders will ask for your government-issued ID, such as your driver’s license or state ID. The lender might also check your social security number, verify your current address, and double-check the expiration date on your ID.
Your passport is another document that holds a lot of weight when it comes to identity verification. Thanks to online applications, many lenders now rely on online passport verification services to check the validity of your passport details quickly and securely. These services tap into official databases, cross-referencing your passport details with global records to ensure everything adds up.
According to AU10TIX, passports are verified online using advanced automated systems running AI and machine learning algorithms. In doing so, these online passport verification companies and systems get the job done quickly and more efficiently. Since passports contain biometric data, they’ve become a trusted way for financial institutions to verify identity documents accurately.
Lenders might also use a passport verification service to scan for fraud, expired documents, or altered information.
Financial Statements
Once your identity is verified, lenders will turn their attention to your business’s financial health. Lenders want to know if your business generates enough income to repay the loan, and they’ll comb through every line to figure that out.
Your profit and loss statement is a must-have. It gives lenders a clear view of how much your business earns, what it spends, and what’s left at the end of the day. Your balance sheet is equally important because it shows the value of everything your business owns and owes.
Assets, liabilities, equity – all these go on the table. Lenders aren’t just looking for a healthy income stream; they’re also interested in your business’s overall stability and net worth.
It’s not just the current financials lenders want. They’ll often ask for historical data, sometimes two or three years’ worth. They need to see patterns and trends, not just a single good year. Organized financial statements make the process smoother for everyone involved.
Tax Returns
When it comes to tax returns, there’s really no way around it. Lenders see them as the ultimate proof that your business is above board. After all, anyone can draft a nice-looking financial statement, but tax returns are filed with the government.
America’s wealthiest are involved in tax evasion amounting to $150 billion a year. People who evade taxes don’t deserve to get loans, so lenders play things carefully here as well.
Expect lenders to ask for both personal and business tax returns, especially if your business is small or relatively new. They want to understand how intertwined your personal finances are with your company and gauge your overall financial responsibility.
If you’ve been diligent about filing and paying your taxes, your returns will work in your favor. But if there are missing years or discrepancies, lenders will definitely raise an eyebrow. If you’re thinking about applying for a business loan soon, make sure your tax returns are updated, accurate, and easy to access.
Business Plan
Believe it or not, numbers alone won’t cut it. Lenders also want to know where your business is headed. A solid business plan shows you’re not just winging it; you’ve got a strategy in place and know how you’re going to use the loan. Think of this as your chance to sell your vision and convince the lender that funding your business is a smart decision.
Your business plan should explain what your business does, who your customers are, and how you make money. But more importantly, it should show how the loan fits into your growth strategy. If you can present a compelling plan, lenders are more likely to feel confident about your ability to repay the loan.
Licenses, Permits, and Legal Documents
No lender is going to hand over money to a business that isn’t fully licensed or operating legally. That’s why you’ll also need to provide any licenses or permits required for your industry.
These documents prove that your business is recognized by local, state, or federal authorities and that you’re complying with all regulations. In some cases, you might also need to show partnership agreements, incorporation papers, or franchise contracts.
Frequently Asked Questions (FAQs)
Why do banks need to know about your past loans before approving a new loan?
Banks check your past loans to assess your creditworthiness and repayment history. A strong record of timely payments increases your chances of approval. Too much existing debt may signal financial strain, making banks hesitant to lend. This helps them minimize the risk of lending to borrowers who may default.
Do you need to show your properties or assets when applying for a loan?
Yes, for secured loans, banks require proof of assets like property, vehicles, or savings as collateral. This reduces their risk if you default on payments. For unsecured loans, like personal loans, assets aren’t always required, but a strong credit score and stable income improve approval chances.
Will banks seize your properties if you fail to pay off your loans?
Yes, if you default on a secured loan, banks can seize the collateral, such as your home or car. This process, called foreclosure or repossession, helps banks recover their losses. However, they usually offer repayment plans before taking legal action. Unsecured loans may result in lawsuits or wage garnishments instead.
Applying for a business loan is not really intimidating; it’s all about being prepared, that’s all. Every document you show serves a purpose – proving who you are, demonstrating your business’s financial health, and convincing lenders that you’re worth the investment.
From identity documents like your passport to your financial records and legal paperwork, each piece helps build trust and speed up the process. If you’re serious about securing that loan, take the time to gather everything you need. The better prepared you are, the smoother the loan process will be.
