Preparing financial documents like your income statement, balance sheet, and cash flow statement makes it easier for lenders to evaluate your risk as a borrower and can help speed up approvals for your small business loan.
Including additional documents will increase your approval chances when they show lenders how you’re likely to repay the loan. These documents also show the lender how they’d be able to recoup their losses if something happens and you can’t pay back the financing.
In addition to the main items, additional documents can include:
- Market research showing how your revenue will increase with upcoming industry growth
- Documents that show how your collateral will retain its value
- Articles of incorporation to validate how long you’ve been in business
Below, you’ll find a few important document examples with tips on presenting them both digitally and in print depending on if you apply in person or online. One thing to keep in mind before applying is that each loan will require different types of documents, like equipment financing will need documents that show what the equipment will be worth and what the new projected gains from the output will be in an ideal scenario.
If you are looking for a working capital loan or payroll financing, you won’t need to submit equipment valuations and depreciation, unless you are using the equipment as collateral on the business loan. The financial statements may be enough.
The documents you need to prepare for a small business loan application generally include:
- Income statement
- Balance sheet
- Cash flow statement
- Business tax returns
- Personal income tax returns
- Bank statements
- Business credit reports
- Formation documents (articles of incorporation) if you’re an LLC or non-profit
- Include your EIN and business licenses.
- Proof of collateral
- Depreciation and appreciation charts for vehicles, land, and equipment
- Business and marketing plans
Pro-tip: For larger printed documents, use tabs to help the loan specialists find their way through the folder and to highlight vital information you want them to see.
Income statements, balance sheets, and tax returns
Your tax returns show how much your company earns, spends, and what is potentially available as cash. With your returns, the lender can determine if you have the ability to make monthly payments. This is different from an annual income report, which focuses on the total income but not the expenses. These documents combined help the lender understand the profitability of your business.
You could also provide a business plan on how you’ll be reducing costs to increase total revenue as a way to build the lender’s confidence. This can be demonstrated by calculating a debt service coverage ratio.
Debt service coverage ratio
A debt service coverage ratio (DSCR) is a quick formula where you divide your operating income by current payments owed.
DSCR = Net Operating Income/Total Monthly Payments
If you are making changes, like switching vendors for less expensive raw materials, getting a better lease, or you’re about to finish paying off a loan, your DSCR will become better. Including this information along with your business or marketing plans will help build confidence for the lender.
Personal income tax returns
If your business doesn’t have a history that displays consistent revenue or stability, personal income tax returns can show lenders that you have the ability to make loan payments. Don’t worry if you don’t have consistent cash flow because you’re a seasonal business or a real estate investing company. This is where personal income taxes, and making a personal guarantee, can reduce your risk level as a borrower.
Personal guarantees are when business owners or investors make a legally binding commitment to use their personal assets to cover the cost of the loan if the business or borrower defaults. There are a few ways to prepare your tax returns for the lender.
If you are only submitting your own because you’re a solopreneur or the sole owner of the company, bring a few years’ worth of tax returns. When you have business partners or investors who will be making the personal guarantee with you, make sure to bring at least one year of their returns in addition to yours. If you’re married and your spouse is not part of the business or loan, you likely will not need to bring theirs.
And don’t stress if your business has fluctuations. Lenders are used to seeing these, and many will expect them in certain industries. Seasonal businesses, like a gift shop in a beach town looking to expand into a new market or an online ecommerce store that has bursts of revenue during Q4 holidays, may not show consistent monthly revenue but may offset slow periods with these more profitable months. If you’re in this situation and monthly revenue is important for the lender, be sure to provide insight into both the slow and strong seasons.
Providing the full context is important. For example: Real estate investors may be sitting on properties, waiting for the market to shift from a winter lull to a highly profitable summer. In this situation, the current snapshot makes it appear as if this business owner may have a hard time making payments, but that’s not necessarily the case.
Bank statements
Lenders use bank statements to see the amount of cash you have on hand each month. This is a way to determine if you’ll be able to make daily, monthly, or quarterly payments. There are a few things you can do with your business bank statements to make a case for why you are a lower-risk borrower.
This starts with having an annual statement along with a breakdown of the 12 monthly bank statements.
- Turn in multiple years of the report with monthly breakdowns to demonstrate the same high cash flow months, showing that seasonality does not impact your ability to make loan payments as you proactively save cash from the busy months to use during the slower ones.
- Using the annual list of monthly payments instead of month-by-month sheets shows the total cash flow annually vs. having the lender see a month-by-month picture where slow months may offset the busier months.
- By using an annual sheet instead of monthly balances, it makes it easier to see when you may have spent more to replace or purchase inventory or equipment, rather than seeing months that seem less profitable.
Business credit reports
Business credit reports come from the three business credit bureaus, Dun & Bradstreet, Experian, and Equifax, and give the lender a way to verify your financial responsibility. Just like a personal credit report, your business credit report shows the debts you currently owe and how often you pay them.
The reporting scale is on a system of 0-100 for Dun & Bradstreet and Experian, and Equifax uses a system of 101-992. The higher the number, the better your business credit score and the more confidence the lender will have in your ability to make payments.
Formation documents for an LLC
Submitting your business’s formation documents (also known as articles of incorporation) lets the lender see how long you’ve been in business. These documents allow them to see your business’s history and to verify that it’s in good standing.
The advantage to submitting this document is that you’ve made the lender’s job easier by validating your years in business. If you have strong financials and a longer history, it shows your business can weather storms like bad fiscal years and market fluctuations. Further, there are two supplemental documents and items you should also include.
EIN
EIN numbers or employer identification numbers are the nine digit numerical codes that the IRS assigns to businesses for paying taxes. Lenders can look up debts and payment histories and see if your business is in good standing both at the state and federal level. When this checks out, you may be considered a lower-risk borrower.
Business licenses and permits
They might not be financial in nature, but showing that your permits and licenses are up to date lets the lender know that you keep your operations above board. Operational responsibility, along with fiscal responsibility, can help build credibility.
Proof of collateral
If the loan you are applying for is secured (requires collateral) instead of unsecured (does not require collateral), then you will want to provide proof that you do in fact own the collateral and have the right to put it up as an asset. Proof of collateral will be anything that shows you have the legal right to the asset, such as:
- Property deeds
- Vehicle titles
- Inventory lists with the receipts all paid for
- Bank statements
- Ownership documents with identification numbers for equipment
Pro-tip: If the collateral is already leveraged for other financing that you received from a different lender, this will likely appear on a UCC filing. Make sure the equipment for this new loan is not on a current UCC filing and that the other lender listed specific identifiers (like VIN numbers and property addresses) so that they cannot claim more than the specific assets you agreed upon.
Depreciation and appreciation charts for vehicles, land, and equipment
Assets like real estate may go up in value, while vehicles may depreciate. By making a chart of the total value of the assets, you can create a compelling collateral offering to go with your application.
For assets that appreciate, show how property and building values have increased year over year and any inspections or valuations you’ve had done recently. For the ones that depreciate, look at resale values and market demand for the model. If the vehicles or machinery remain in demand (despite depreciation) and there is a shortage of supply, this shows the lender it may be easier for them to sell if you default on your payments.
One way to show that assets remain in demand is to track them in marketplaces, trade publications with listings, and online auctions. The online options allow you to share insights into how fast they move and the total amounts they go for, letting the lender feel confident they can get their money back if you default.
Business and marketing plans
Business and marketing plans are not technically financial documents, but both forecast how your revenue will change if you have the funds to implement them. That is why they can help you with a small business loan as supplemental materials.
If you want to stand out from the crowd, add numbers and data that the lender is likely not going to expect. This shows you have some serious business and marketing acumen.
- Cite data from the census bureau about the increase in potential customers for your brick-and-mortar store or service business by comparing it to your customer data. If the zip codes you plan on servicing are growing with your customer demographic, that can justify that now is the time to grow.
- City planning data can also be a key indicator. If you are a dog groomer or run a children’s clothing boutique and there are dog parks being added to the residential areas or schools being built, chances are there will be new potential customers moving in.
- Online businesses can forecast projected growth by adding an app if customers have switched from computers to mobile devices. By upgrading to an enterprise level system, they can market better and grow, and they can share the projected revenue with the increased users or output. Growth initiatives could include email and SMS messaging, reaching more top-of-funnel customers via paid media, or they could include upgrading servers to handle TV media buys and large influxes of traffic.
By providing the right financial documents, you can build the lender’s confidence in you as a borrower. When done well, considering the tips above, this can make it easier for a lender to review your application and provide an approval, if you meet their eligibility criteria.
