What lenders look for in a business loan application
Getting ready to apply for a business loan? Like applying for a home loan, lenders will carefully scrutinise your business loan application to ensure you can pay back what you borrow without difficulty.
Even if you’re confident your business can pay back the loan without issue, you need to prove this to the lender in your application. When you apply, lenders will tell you what information they need from you to assess your suitability for a loan.
As a non-bank lender, OnDeck has a streamlined application process designed to help eligible applicants get funded quickly. When you apply for one of our business loans, we will ask you for:
- Basic details about you and your business
- Proof of identity documents (such as a Drivers Licence or Passport)
- Last six months of business financial statements (in some cases, we may ask for personal bank statements)
Below is an explanation of the different kinds of documents you may be asked for during a business loan application and why lenders ask for them.
Business financial statements
A key consideration for lenders when assessing business loan applications will be the prospective customer’s current and projected financial health. When you apply for a business loan, lenders will request financial statements detailing your business’s financial situation.
Your balance sheet is a snapshot of your business’s assets and liabilities at a particular point in time. This information helps lenders understand what your business owns (assets) and what it owes to others (liabilities).
An understanding of your business assets is crucial when applying for secured loans, as lenders will use these as collateral if you default on your loan repayments. A lender needs detailed information about your assets to determine their value as a means of offsetting your perceived risk as a borrower.
Profit and loss statement (income statement)
Your profit and loss statement, or income statement, records your business income over a specific period. This information is essential for lenders to evaluate your company’s financial health and viability.
Most lenders will have a minimum requirement for your business’s profit margin to be considered for one of their business loans. They want to see that your business is generating enough profit to comfortably make loan repayments.
For example, at OnDeck, we require your business to have a minimum $100,000 gross annual turnover to be considered for an unsecured business loan.
Cash flow statement
Your cash flow statement shows how much cash flows in and out of your business over a given period. This information helps lenders understand your business’s ability to generate money and repay debts.
Since you will be making regular loan repayments if approved for a business loan, the lender needs to assess your capacity to generate enough cash to cover these repayments without putting strain on your business.
Business tax returns
Lenders may also request copies of your business’s past tax returns. How far back a lender will go in requesting this information will depend on their lending criteria, but it’s usually only a matter of one to three years.
This information is useful for understanding your business’s long-term financial performance and capacity to repay debts.
Personal financial statements
In addition to business financial statements, some lenders may also ask for personal financial statements from the business owner or owners. In many small businesses, the owner’s personal income and finances are closely intertwined with the business itself.
As a result, lenders need to get a clear picture of both the business’s and the owner’s personal financial position when making a decision. To obtain this information, lenders may check your personal credit score, tax returns, and bank statements.
Proof of identity documents
Unless you’re already an existing customer with the lender, you’ll likely have to provide standard proof of identity documents when you apply for a business loan. This typically includes a government-issued photo ID, such as a driver’s license or passport.
Your business credit score
Your business credit score is an independently calculated metric lenders use to assess your credit worthiness. This score is based on your business credit report, which details your business’s credit history.
Lenders will check your business credit score when you apply for a loan to help them determine your ability in managing debt.
Your score is calculated based on a variety of factors, including:
- Payment history (e.g., how consistently you make payments on time)
- Amount of credit utilisation (how much of the total credit available to your business is being used)
- Length of time your business has been in operation
- Number and type of trade accounts that are currently active
Scores range from 0 to 1200 and are divided into bands (Poor, Good and Excellent). The higher your credit score, the more faith a lender will have in your ability to pay back what you borrow from them.
At OnDeck, we have a minimum business credit score requirement of 400 to be considered for one of our business loans.
Learn more about your business credit score and check your score for free with OnDeck. You can also check out our guide on how to improve your business credit score so that you have a higher chance of getting approved for business finance.
Frequently Asked Questions
Why are there so many requirements to apply for a business loan?
When a bank or online lender provides a business with a loan, they are taking a risk that they won’t be able to recover their money. Therefore, it’s in the lender’s best interests to comprehensively screen applicants to minimise their risk as much as possible.
What criteria do you need for a business loan?
Every lender has different criteria you need to meet to be eligible for one of their business loan options, but they all typically include:
- A minimum credit score
- A minimum time in business
- A minimum annual revenue
- A personal guarantee or collateral
Does being rejected for business loans hurt my business credit score?
. When you apply for a business loan, a hard inquiry will typically be recorded in your credit file, bringing down your score.
So, if you get rejected for several business loans, your credit report will be negatively impacted by successive hard inquiries. This is why it’s important to carefully prepare for a business loan application to minimise your chance of being rejected (and incurring a hard inquiry for no gain).
Luckily, you can use OnDeck’s Know Your Score tool to check your business credit score for free without recording a hard inquiry.
Prepared by OnDeck Capital Australia Pty Ltd ABN 28 603 753 215 (“OnDeck”) for general information purposes only. Content may belong to or have originated from third parties and OnDeck takes no responsibility for the accuracy, validity, reliability or completeness of any information. Information current as at July 2022. You should not rely upon the material or information as a basis for making any business, financial or any other decisions. Loans issued in Australia are subject to the terms of a loan agreement issued by OnDeck. Loans are subject to lender approval. OnDeck® is a Registered Trademark. All rights reserved.