If you’re like most small business owners, the thought of taking out a loan to grow your business is daunting. Loan documents are key when small business owners are seeking financing. But what documents do you need for your loan application, and where do you start? Relax – we’ve got you covered. In this article, we’ll reveal a list of 14 essential documents for small business loans.
What Personal and Financial information Do Lenders Require?
So what are loan documents? Loan documents are a series of forms and applications used to apply for a loan, including the promissory note, security agreement, and disclosure statement. The loan documents provide the lender with all of the information they need to make a decision on the loan. In addition to business and financial information, the lender may also require statements of personal information, such as your credit score and your debt-to-income ratio.
The 4 Main Types of Loan Documents
There are four main types of loan documents a borrower must provide when seeking business financing, including the:
- Loan Estimate. The loan estimate is the first part of the lender’s paperwork and outlines the terms of the loan.
- Rate Lock Form. The rate lock is a written agreement between the borrower and lender that guarantees the loan rate for a certain period of time.
- Borrower’s Information. The borrower’s information is a form that includes the personal information of everyone who is listed on the loan application.
- Closing Disclosure. The closing disclosure provides final details about the loan including any terms or riders.
|Loan Document Type||Description|
|Loan Estimate||The initial document outlining the terms and conditions of the loan, setting the foundation for the agreement.|
|Rate Lock Form||A written agreement that ensures the loan rate remains unchanged during a specified timeframe.|
|Borrower's Information||A comprehensive form capturing personal details of all individuals listed on the loan application.|
|Closing Disclosure||The final document presenting conclusive information about the loan, encompassing terms and potential riders.|
- READ MORE: Small Business Loan Requirements
14 Documents Required for Loan Approval
Are you wondering what documents are needed for a small business loan? The entire agreement, or loan package, consists of a number of documents that the borrower and lender will sign. And while some lenders don’t require a personal guarantee from the owner of the business, other lenders may require it. The loan application process can be lengthy, so it’s important to start gathering the necessary paperwork as soon as possible.
Small Business Deals
1. Updated Business Plan
An updated business plan is one of the first things a lender will request. Your business plan should include your company’s financial history and balance sheet, as well as your current and future goals. This document will give the lender a better understanding of your business and help them determine if you are a good candidate for a loan.
2. Business Income Tax Returns
Business income tax returns are another important document that lenders will request. This paperwork provides the lender with information on your business’s income and expenses. It is important to note that lenders will usually request tax returns for the past three years.
3. Bank Statements
Bank statements that show cash flow for the past three months are also required by most lenders. This document will help the lender understand your business’s financial situation and determine if you have the ability to repay the loan.
4. Business Registration
Lenders will also require proof of your business’s legal registration. This can be in the form of a business license, articles of incorporation, or a partnership agreement.
5. Business licenses
Business licenses are required in order to operate in most states. This document will show the lender that your business is legitimate and that you are operating within the law.
6. An EIN
EIN, or Employer Identification Number, is a unique number assigned to your business by the IRS. This document is required in order to open a business bank account and will be used by the lender to verify your business’s identity.
7. Financial Statements
Financial statements include your business’s balance sheet, income statement, and cash flow statement. These financial statements will give the lender a better understanding of your business’s financial situation. If you are applying for a loan, it is important to make sure that these statements are up-to-date and accurate.
8. Loan Purpose and Use
Unlike personal loans, business loans usually have to be used for a specific purpose. Your desired loan amount could be used for buying inventory, expanding your business, or hiring new employees. Lenders will want to see how you plan on using the loan funds and how it will benefit your business.
9. Loan History
If you have taken out a business or personal loan in the past, lenders will request information on your repayment history. This document will show the lender how you have handled previous loans and whether you are a responsible borrower.
10. Collateral and Guarantees
Many lenders will require collateral for a business loan. This means that you will have to put up something of value, such as your home or car, in order to secure the loan. In some cases, a personal guarantee may also be required. This means that you, as the owner of the business, will be held personally responsible for the loan.
11. Credit Report
Your personal credit report is another important document that lenders will request. Your credit report will show the lender your credit history and whether you have been responsible for previous loans. A good credit report and score will increase your chances of being approved for a loan.
12. Account Information
In order to complete the loan application process, you will need to provide your business’s account information. This includes your bank account number, routing number, and account balance. The lender will use this information to deposit the loan funds into your account.
13. Budget & Future Cash Flow Estimates
A budget and cash flow forecast are important documents that will show the lender your plans for the future. This document will help the lender understand how you plan on using the loan funds and whether you will be able to make the repayments.
14. Income Statement
An income statement is a document that shows your business’s revenue and expenses over a period of time. This document will help the lender understand your business’s financial situation and determine if you have the ability to repay the loan.
Other Information Business Owners May Need
In addition to the standard loan documents, there are a few other pieces of information that business owners may need to provide, depending on the different lenders. They may require your information on your living situation, address proof, and evidence of business experience.
Frequently Asked Questions
What are loan documents, and why are they important?
Loan documents encompass a set of forms and applications used to apply for loans, including the promissory note, security agreement, and disclosure statement. These documents provide lenders with the necessary information to assess loan applications. Personal and financial information, such as credit scores and debt-to-income ratios, may also be required.
What are the main types of loan documents for business financing?
The four main types of loan documents include:
- Loan Estimate: Outlines loan terms and is the initial part of the lender’s paperwork.
- Rate Lock Form: Establishes a guaranteed loan rate for a specific period.
- Borrower’s Information: Contains personal details of individuals listed on the loan application.
- Closing Disclosure: Provides final loan details, terms, and riders.
What documents are typically needed for a small business loan application?
- Updated Business Plan: Including financial history and goals.
- Business Income Tax Returns: Demonstrating income and expenses for the past three years.
- Bank Statements: Reflecting cash flow over the past three months.
- Business Registration: Proof of legal business registration.
- Business Licenses: Documenting compliance with state regulations.
- Employer Identification Number (EIN): Unique IRS-issued number for business identity verification.
- Financial Statements: Balance sheet, income statement, and cash flow statement.
- Loan Purpose and Use: Explanation of how the loan will benefit the business.
- Loan History: Details of previous loan repayment history.
- Collateral and Guarantees: Assets offered as security or personal guarantee for the loan.
- Credit Report: Personal credit history and score.
- Account Information: Business bank account details for loan fund deposit.
- Budget & Future Cash Flow Estimates: Plans for loan fund utilization and repayment.
- Income Statement: Business revenue and expenses over a specific period.
Are there additional pieces of information business owners might need to provide?
Depending on the lender, business owners may need to provide information related to their living situation, address proof, and evidence of business experience. These additional details help lenders assess the overall risk and viability of the loan application.
Why is gathering loan documentation important for the application process?
Gathering loan documentation well in advance is crucial due to the often lengthy loan application process. Having all necessary paperwork prepared ensures a smooth application and increases the likelihood of loan approval. It also demonstrates your commitment to transparency and financial responsibility, which can positively impact lenders’ perceptions of your business’s credibility.
In the realm of small business growth, the prospect of securing a loan often accompanies both excitement and apprehension. As you chart this course, understanding the integral role of loan documentation becomes paramount. The documents you present to lenders serve as more than ink on paper; they paint a vivid portrait of your business’s journey and potential.
From comprehending the core nature of loan documents to delving into their specifics, you’ve embarked on a journey of preparation. The four primary types of documents – Loan Estimate, Rate Lock Form, Borrower’s Information, and Closing Disclosure – establish the foundation of loan terms and expectations. Beyond these categories, the array of 14 essential documents, including an Updated Business Plan, Financial Statements, Credit Reports, and more, form a comprehensive mosaic that lenders use to evaluate your business’s readiness for financing.
As you move forward, armed with the knowledge acquired here, remember that these documents are bridges connecting your aspirations to financial support. Each piece reflects your business’s dedication, viability, and strategic vision. With this understanding, you’re well-equipped to not only secure the loan your business needs but also forge a path towards sustainable growth and success.
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