Reasons Small Business Loan Providers Ask For Multiple Documents
Business loans are immensely beneficial for all trades, irrespective of their size and the industries they operate in. Every entrepreneur requires financial aid at some point to cope with emergencies or just expand the business horizon. Besides non-flexible, difficult-to-acquire bank loans, in the case of which, both the application and approval process are quite long, today, there are alternative financing options available for businesses that are unable to meet the eligibility criteria for bank loans. Alternative financing options like Merchant Cash Advances(MCAs), Business Line of Credits(LOCs), Invoice Factoring etc. are comparatively less rigid, when it comes to credit score requirements, and usually come with a short repayment term, which goes maximum up to 1 year. Also, the application process for these financing options is quick and simple, approvals are provided within hours and fund disbursements are made within 48 to 72 hours of the approval. Alternative financing options often turn out to be helpful for those looking for urgent cash, as these provide same-day approvals.
However, the approval comes only after the applicant has provided all the required documents and the underwriter is convinced that the monthly/weekly income of the business is sufficient to cover the periodic repayments. In the case of alternative financing options like MCAs, the underwriter considers the field or industry, the applicant is trading, the size of the firm and the office setup. Besides, an MCA underwriter analyses the number of non-sufficient funds (NSFs), overdrafts, and bank balances that are negative on a daily/monthly basis. The existing Tax liens, judgement liens, and bankruptcy filings are also taken into consideration.
Though alternative lenders have comparatively fewer requirements, there are certain documents even alternative lenders ask for. MCA providers require documents, that define the financial history of the applicants, like profit-loss and bank statements of the last 6 months to 1 year, tax returns, AR (accounts receivable) summary, proof of the annual gross sales, agreement with a credit card processor and documents that display the businesses’ credit card payment volume. This helps the lenders to analyze the profitability of the businesses and the borrowers’ capability of repaying the advance with their daily/weekly income, as the lenders withdraw a fixed percentage directly from the borrowers’ daily credit card sales. Applicants that witness monthly transactions of at least $3,000 and don’t have any liens on their business-owned property are considered potential candidates by MCA lenders.
When it comes to the application for other small business loans, there is a standard list of documents that small business owners need to submit. However, the number of required documents varies with lenders. Hence, a small business owner looking for finance should gather adequate knowledge about the documentation required for the type of financing option he/she is planning to opt for. This will not only reduce the application stress but will also speed up the approval process. In the case of small business loans, lenders try to understand the applicants’ ability to repay the loan and hence are eager to know the existing debt and current income of the applicants.
List of documents, small business loan providers generally ask for:
Providing an idea about the business’s financial situation, bank statements disclose the amount of cash the applicant currently has on hand, and the regular cash inflow and outflow. Lenders generally ask for bank statements of 6 months to 2 years, depending on the current situation and requirements of the applicants.
Though not all financers ask for credit statements, some do, especially banks. These help the lenders to evaluate the applicant’s ability to repay the borrowed amount. Some traditional small business loan providers consider the business as well as the personal credit reports of the applicants to see the current debt-to-income ratio. The applicants that have outstanding debt obligations, like existing loans, are less likely to get approvals on the current applications. Purchases made on a business credit card or business line of credit will also reflect on the credit reports.
Lenders often ask for corporate as well as personal income tax returns of around 1 to 2 years. Tax returns help small business loan providers to get an idea about the applicants’ income and its source. Also, a lender uses these documents to understand if the business’s income is consistent over the last few months/years and if the applicant is capable of making regular payments.
Financial statements, which comprise the balance sheet, income and cash flow statements, enable the lenders to understand the current financial situation of the businesses and help to decide the applicants’ creditworthiness. Hence, loan applicants need to submit accurate and up-to-date statements to get through the underwriting process.
All types of small business loan providers review the business licenses of the applicants to make sure they are legally conducting their businesses.
Documents like commercial lease certificates help the lenders to understand if the applicants are operating their businesses on rented or owned properties and if rented, then what are the terms of the leases.
Article of Incorporation:
This explains the structure of the applicant’s business, the state it is registered in etc.
These help the lenders to get an idea about the scope of growth and the estimated future revenue of the applicants’ businesses.
As the lenders are, technically, in the business of risk management, they tend to review all the documents, especially the income-related ones, to make sure they are not putting on high-risk loans on their balance sheets.