Startups and established businesses alike use business loans in different shapes and forms whether it is to improve their cash flow, buy inventory and grow their businesses. From just a few hundred dollars to a few million, there is a procedure to be approved and funded.
The criteria for a business loan can be different to a typical personal loan and whether you are applying with a bank, private lender, angel investor or VC, they will typically ask for the following information.
Financial Statements
Financial statements from the last 12 months (and sometimes 24 months) can give an indication of a company's financial health and gives a useful overview of all their costs, revenue and profits. For companies that are less than 6 or 12 months old, these may not be available and this could restrict the lenders they work with. Many business lenders, VCs and angels would like to see the company as revenue making to be eligible for a business loan.
Financial statements will include:
Income Statement (Profit and Loss Statement): This shows your business’s revenue, expenses, and profit over a specific period, helping lenders assess your profitability.
Balance Sheet: This provides a snapshot of your business’s assets, liabilities, and equity at a particular point in time, showing the overall financial position of your business.
Cash Flow Statement: This document outlines the cash inflows and outflows from your business operations, investments, and financing activities, helping lenders understand your business’s liquidity and how well you manage cash.
3 Months Worth Of Bank Transactions
Business lenders and investors often want to see the last 3 months worth of bank transactions or statements, to see how much revenue the company is making and what current financial position it is in.
Being cash negative is not necessarily frowned upon, because you might be needing a business loan to turn the corner and become cash positive. But showing signs of stable and growing revenue is positive.
Financial Forecasts
Business loan providers will want to know what the expected growth and revenue is - because this indicates that loan repayments can be made on time.
Showing a forecast that is well thought out and includes costs and considerations is worth showing.
Value of Assets, Collateral or Invoices
Whilst some business loans are unsecured (typically up to $50,000), there are options that use security and collateral such as your property, home, offices, warehouses, stock and invoices (known as factoring).
If you are using these as security, you will need to show a recent valuation by a professional and based on its value and condition, this could help you borrow more and at more affordable rates.
How Fast Can Business Loans Be Approved?
If your loan is unsecured, it is fairly common to be approved and funded within 2-3 days. If the loan application is online, the process is a lot more streamlined and quick. This includes borrowing money from a bank, especially if it is your own bank , because the results and funding can be almost immediate.
But if you are apply for a secured loan, VC or angel, you will need to go down the business plan and forecasting route so this can take several weeks and months.
Which Business Loans Are Cheap and Which Are Expensive?
Pretty much any loan can be used for a business, because the borrower can convert this and put this into their business, including credit cards, payday loans and overdrafts.
Using payday loans and overdrafts are the most expensive products around and can carry high interest rates (payday loans are 200% to 400% in the US).
For more affordable finance, use things like 0% credit cards, credit unions or ones that are backed up by collateral such as invoice factoring or secured loans.
Do Business Loans Use Credit Checking?
Some unsecured business loans do use credit checks as way to determine eligibility because it gives an indication of the how well they have paid other forms of credit and loans in the past and how many the company or director has open. In which case, the credit check could be on the company director, since business's do not have a credit report, but it is possible for them to have arrears and defaults.
With this in mind, credit checks are not usually used in business loans. They also fall outside of the scope of a lot of regulation (business loans are not regulated by the FCA in England for example). There is regulation if you are borrowing money against your home, because there needs to be procedures in place to avoid people losing their primary residence.
So if you are looking for a loan without credit checks, a business loan can be a sensible option but you will need to demonstrate healthy financials and a structured and organised financial model in order to get accepted by most banks, VCS and private lenders.
