Bank loan requirements – One of the first things overly-optimistic entrepreneurs discover as they look for funding is that banks don’t fund business plans. In their defense, it would be against banking law if they did. Banks are dealing with depositors’ money. Would you want your bank to invest your checking account balance in a startup? I wouldn’t.
If you are applying for a bank loan, then, you should be ready to answer some questions from the bank/s. So here’s what to expect a bank to ask for when you apply for a commercial loan for your business. There will be occasional exceptions to every rule, of course, but here’s the general rule:
Bank Loan Requirements You Should Have
Below are the full list of the items that will be required by the bank.
So your business need to have assets it can pledge to back up a business loan. Banks look very carefully at these assets to make sure they reduce the risk. The need for collateral also means that most small business owners have to pledge personal assets, usually property, to get a business loan.
2. Business P
There are exceptions, but the vast majority of commercial loan applications require a business plan document. Nowadays it can be short—perhaps even a lean business plan—but banks still want that standard summary of company, product, market, team, and financials.
3. All Your Business’s Financial Details
That includes all current and past loans and debts incurred, all bank accounts, investment accounts, credits, and of course, supporting information including tax ID numbers, addresses, and complete contact information.
4. Complete Details on Accounts Receivable
That includes aging, account-by-account information (for checking their credit), and sales and payment history.
5. Complete Details on Accounts Payable
That includes most of the same information as for Accounts Receivable and, in addition, they’ll want credit references, companies that sell to your business on account that can vouch for your payment behaviour.
6. Complete Financial Statements, Preferably Audited or Reviewed
The balance sheet has to list all your business assets, liabilities and capital, and the latest balance sheet is the most important. Your Profit and Loss statements should normally go back at least three years, but exceptions can be made, occasionally, if you don’t have enough history, but you do have assets to pledge as collateral.
7. All Your Personal Financial Details
This includes net worth document, details on assets and liabilities such as your home, vehicles, investment accounts, loans, mortgages, the whole thing infact. For businesses with multiple owners, or partnerships, the bank will want financial statements from all of the owners who have significant shares.
8. Insurance I
Since it’s all about reducing the risks, banks will often ask newer businesses that depend on the key founders to take out insurance against the deaths of one or more of the founders. This is called Key man risk. If the founder dies, the insurance will pay to clear the loan.
Also See: All Nigerian Banks Offering PayDay Loans
9. Copies of Past Returns
I think this is to prevent multiple sets of books which I think would be fraudulent, by the way .
But banks want to see the tax returns filed.
10. Agreement On Future Ratios
Most commercial loan include what we call loan covenants, in which the company agrees to keep some key ratios—quick ratio, current ratio, debt to equity, for example—within certain defined limits. If your financials fall below those specific levels in the future, then you are technically in default of the loan.
So you know the bank loan requirements. Go do a proper homework before embarking on this.