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Key takeaways
- Short-term business loans require applicants to provide personal and business documents, such as a business plan, business license and owner information.
- Lenders will analyze your company’s financial situation, including bank and tax statements, to determine your eligibility.
- Most lenders require collateral or a personal guarantee from the business owner for short-term loan approval.
Whether you own a startup or an established business, a short-term business loan can provide the funds you need to cover unexpected costs or take advantage of a time-sensitive opportunity.
Applying for a short-term business loan typically requires several key documents, and being prepared can make the process easier, improving your chance of approval.
Updated business plan
A business plan is a written document that describes your company, what it does, how it will use the loan and how it plans to make money. In short, it provides a useful snapshot into exactly what kind of company you run and how you plan to succeed.
Having a business plan shows lenders that you’re organized and have a good sense of your business’s operations. It also lets them see how you’ll make the money you need to repay the loan.
When writing your business plan, be realistic. Don’t assume you’ll generate massive profits because lenders will think you’re being unrealistic and may result in a loan denial. Also, make sure to acknowledge and address potential risks. This will show the lender that you understand your industry.
Where to get help writing a business plan
Writing a business plan can be tricky. Thankfully, there are many resources available for people who need help.
SCORE is a Virginia-based nonprofit organization that works with the U.S. Small Business Administration. It offers help and resources to companies nationwide. One such resource is a business plan template you can use to guide you as you write your business plan. You can also work with a SCORE mentor to get personalized help. The Small Business Administration also assists businesses, including information on writing a business plan.
Bank statements
The primary thing a lender cares about when determining whether to lend you money is whether you’ll repay the loan. That means lenders will want to analyze your company’s financial situation to make sure it can handle repayment.
Lenders will look at the bank statement for your business bank account to see how much money is in the account and how much you usually spend per month. They’ll also note any unusual expenses. Be ready to provide the last few statements for each bank account your business has.
Income statements
Lenders will also want to look closely at your company’s income statements. Even if you have a lot of cash in the bank, spending more than you make is a bad sign and could lead to business loan default.
Lenders will examine your income statement to ensure your revenue is stable or growing rather than shrinking. They’ll also make sure that your income is sufficient to handle payments on a new loan.
Personal and business tax statements
Many lenders will also ask for your recent tax return information. They can ask for both your personal and company tax documents.
Expect to need your business’s tax return showing revenues and expenses and Schedule L of Form 1120 showing your company’s balance sheet. These documents will let the lender understand your company’s performance over the past few years.
The lender may also ask for your personal tax documents, especially if you’re running a new company and have to offer a personal guarantee. Be ready to provide your Form 1040 showing your full tax return details and Schedule C, which details your income from the business if you’re a sole proprietor.
Bankrate insight
Lenders, including traditional banks and online loan providers, often require a personal guarantee from the business owner when applying for a short-term business loan. This guarantee means the business owner will be personally responsible for paying back the loan if the business defaults. Personal guarantees can apply to both secured and unsecured loans.
How does a lender use annual revenue to determine business loan eligibility?
Consistent revenue is a key business loan requirement. Banks and credit unions typically require at least $250,000 a year, while online lenders may only require $100,000 for a conventional business loan.
Traditional funding options will prioritize revenue and profitability figures on balance sheets and tax returns. A good debt service coverage ratio also increases the likelihood of loan approval. This ratio compares available operating income with current debt obligations.
Business licenses and permits
Be ready to provide your business formation documents and any relevant licenses or permits when you apply for a short-term business loan. For example, if you run a restaurant, have your health inspection certificates, permits and food service licenses ready.
This will help the lender confirm that your company is legitimate and that you comply with local law.
Additional business and financial documentation
On top of the above documents, be ready to provide some or all of the following to your lender:
- Your driver’s license
- Your Social Security number
- Franchise agreements (if applicable)
- A current list of accounts receivable
- A list of current debts
- Projected financial statements for the next year
Bottom line
Applying for a short-term business loan can help your company get the money that it needs, but the process can involve a lot of paperwork. Make sure you have the required documents, such as a business plan, bank statements, an income statement and tax statements.
Additionally, a personal guarantee from the business owner may be necessary. Having all of the required documents ready in advance and understanding the criteria for loan approval can make the loan application process smoother and increase the chances of getting the funding you need.
