Applying for a loan may seem difficult considering all the required documents. That’s why it’s always essential to prepare appropriate company paperwork before you apply for a loan.
Depending on the financial institution you work with, you may be required to complete several sets of paperwork to qualify for a business loan. If these proofs aren’t provided, or if incorrect data is supplied, it might result in the company being denied necessary funding.
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In this post, we’ll address documents frequently requested by lenders in the loan application procedure. Usually, the more details entrepreneurs can offer to business lenders, the simpler it’ll be to get quickly approved.
Table of contents
- What can you use business loan for?
- Required documents for business loans
- How to choose the best loan for your business
- Final thoughts
What can you use a business loan for?
You can use most business financing for any purpose you like, offering it is related to your company’s operations. However, knowing why you’re seeking a business loan and what you will use the funds for before you borrow is sensible.
Some of the typical applications for business loans include:
- Filling gaps in cash flow
- Meeting unanticipated costs
- Hiring new employees
- Moving to bigger premises
- Purchasing new machines or equipment
- Investing to boost manufacturing
- Purchasing stock, etc
Required documents for business loans
Tax returns
Lenders usually request your company’s tax returns for the previous few years. These returns provide a distinct perspective of the company’s financial performance and compliance with tax laws. They give lenders more information about your financial situation by revealing your income, deductions, and net income.
Incorporate these records as part of your loan application to demonstrate to financial institutions that you’re an accountable borrower with a track record of financial accountability and compliance. Lenders appreciate well-prepared applications which demonstrate your dedication to your company’s success.
Income statement
Your income statement reports how the company has traditionally experienced cash flows. Generally speaking, a statement of earnings will be clearly separated into columns of income and expenditures.
Income statements are particularly useful to company lenders who want to understand how the company performed over the past year(s). Even if your expenses surpass your revenues — which frequently is the case for newer businesses — every kind of lender will require your income statement.
Financial forecasts
Most financial institutions will want to see that you’ve got an organised strategy for using the loan, such as a best- and worst-case scenario projection. For lenders to have all the information they need to make an informed decision, you must provide your perspective on what might happen with the money invested.
Financial forecasts are an estimated view of an organisation according to previous financial performance, and financial institutions will use them to understand the company’s current situation. It assists them in seeing a clear return on their expenditure should they embrace your application.
Proof of ID and address
Proof of ID can be offered as a passport or driving licence. Proof of address can be given as a utility invoice or personal bank account statement.
Proof of ID and address are used to guard against the potential of fraud and money laundering. Basically, it is to verify that you are the individual you say you are and pass any additional requirements like being over 18. Also, you need to submit the proof of ID and address of the business.
Management accounts
Management accounts offer an up-to-date impression of how the company operates in account form. A lender can use them to predict what will be on the next set of accounts.
Management accounts typically involve the profit and loss of the company and a balance sheet, but there usually are no set rules.
Accountancy software can assist you in producing and generating the financial reports you need when seeking a business loan.
Credit report
To gain the availability of additional capital, your company should show a history of settling back loans in full and on time.
While it’s not impossible to get approved for a loan even with bad credit, online lenders will charge you more or provide you with a smaller loan amount in exchange for your bad credit. In certain instances, they might want collateral to secure the loan.
The variations between your individual and your business credit scores will rely on the particular framework of your business. Usually, it’s suggested that you create an independent legal structure for your business (Partnership, LLC, Corporation, etc.). This way, variables like overdue payments on old student loans won’t impact your lendability as a company owner.
Getting a credit report from one of the credit reporting agencies is a good place to start. A high credit score will make you an ideal candidate for a loan, improving your chances of being accepted.
You can also make necessary corrections to your report before submitting your application. If your score is low due to company credit card debt or other financial problems, it may be useful to concentrate on enhancing your score before applying for a loan.
How to choose the best loan for your business
Comparing the loans you qualify for and selecting the best-fit loan is the key to choosing the appropriate business loan application. You should check the following:
Annual percentage rate (APR)
A loan’s APR represents the loan expenses on an annualised basis, such as fees and interest. Comparing APRs can give you a perspective on which company loans will be the most and least affordable.
Charges
Lenders may charge initial expenses for handling your loan application. You can compare costs more effectively by projecting and accounting for these fees in the calculation.
Repayment terms
Terms for business loans may vary from one year to 25 years. While a longer loan period may result in lower monthly payments, the total amount of interest paid will rise over time. The right loan term for you will be based on your objectives and what monthly payments you can afford.
Funding speed
For applicants with excellent credit, business loans from large banks may provide attractive rates; moreover, the application procedure may require more work. If funding speed is an important priority, online lenders can offer faster funding.
Hire small business accountant
Work with a UK-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.
Final thoughts
Preparing the above mentioned documents is crucial when applying for a company loan as they provide financial institutions with the information required to assess your financial standing and evaluate the risk of lending to your business.
By properly organising and presenting these documents, you improve your chances of getting the funding required to support your business growth and expansion plans.
