What information do lenders request before issuing loans to a small business
Small businesses that are looking to borrow money will need to provide some basic information to the lenders who are going to be advancing them these funds. The exact information that they will need to advance to the lenders will depend greatly on the type of loan that they are pursuing as well as the reputation and how well established the company is. For purposes of simplicity, this article will focus on the loans that are commonly advanced by banks to small businesses as these are typically the most restrictive loans that require the greatest amount of documentation. From here, the information requested tends to be lower in quantity and significance.
Information Often Requested by a Lender to a Small Business Before a Loan is Advanced
Before you receive a quick business loan, your company will need to prove your credit worthiness. Past financial statements and income tax returns are commonly provided. Having these audited or reviewed by a CPA firm greatly improves their quality and the assurance the potential lender has. Copies of bank statements will also have to be provided to the lender as will descriptions of your business model and future budgets and projections. Basically, you will need to provide to a lender a plan for repaying the loan a well as what you intend to use the loan proceeds for. Different lenders ask for different things but the overall lender will want to understand your company’s creditworthiness as well as what could lead to your company’s future default such as contingencies like bankruptcies, major warranties, or other critical factors. Information supporting this and your organizational structure are other similar items that are commonly requested by a potential lender.
After small businesses receive money from lenders they will often be required to submit, monthly, quarter, and annual financial statements that are reviewed or audited by a CPA firm. These reports are then used to calculate whether or not the company is adhering to the covenant calculations that are included in the bank loan. The company will need to provide a compliance certificate to the bank with their calculation of the covenant in order to show their compliance to the underlying rules. Copies of internal controls certificates are also provided and information on major events such as significant litigation is often required to be attached to the compliance certificate. Finally, copies of the company’s income tax returns are also commonly attached and provided to a lender.
Bank loans can be challenging to obtain and maintain but by understanding the documentation that you will need to provide to a lender, both before and after you get the loan, you will better be able to prepare for this by having staff members on hand who can draft the needed information. As with audited financial statements you will need to consult with a third party to perform an audit and other preparation is therefore needed.