Applying for a business loan means sharing a lot about your business, and it’s reasonable to wonder why a lender needs everything they ask for. However, each requirement on an SBA 7(a) loan application has a good reason behind it. Knowing the reason makes the process easier to work through, from pulling together tax returns to deciding how much of your own cash to put into the project.
Your lender wants to understand your plans and how you’ll handle loan payments. The items they ask for help them do that and also protect both your business and your lender by making sure you can comfortably repay the loan before you take it on.
Each application is specific to your business and financing needs. Your lender will confirm which of these requirements apply to you and will likely ask for items beyond this list. The requirements below are the most common ones, organized around three things lenders consider: whether your business can repay the loan, who stands behind it, and what it will pay for.
Can your business handle the loan payments?
Your lender wants to see that your business can make loan payments while keeping up with its other expenses. To assess that, they look at your past performance, current finances, and future plans. These four items help show how the new payments would fit into your business:
- Three years of business and personal tax returns. One strong year doesn’t tell the whole story. Several years of returns give your lender a broader view of how your business has performed, including during slower periods.
- Interim financial statements and bank statements. Tax returns can be a year or more old. These more recent records bring your lender up to date on what’s happened since your last return and where your business stands now.
- A business plan with financial projections and assumptions. Your business plan explains where you’re headed. Projections show what you expect to earn and spend. Assumptions explain the reasoning behind those numbers and help your lender assess whether they’re realistic.
- A debt schedule. This is a list of what your business already owes. Your lender reviews those obligations alongside the proposed loan payments to see whether your business can afford more debt.
Who stands behind the loan?
The numbers are only a part of the picture. Your lender also considers your commitment to your business as an owner and what could support repayment if your business runs into trouble. That’s where personal guarantees and collateral come into the picture.
Personal guarantee: Show your commitment
Everyone who owns 20% or more of the business must personally guarantee the loan, meaning you and those owners are ultimately personally responsible for repayment. It shows your lender that you are committed to your business even when challenges arise.
Conventional lenders generally use the same 20% requirement. Understanding this responsibility now can help you prepare for future bank financing.
Collateral: A second path to repayment
Collateral is an asset you pledge to secure your loan. The SBA requires lenders to take every available asset as collateral. If you cannot repay the loan, the lender has the right to take this asset to recover their money. Lenders look to business assets first. If those don’t fully cover the loan amount, owners with 20% or more of the business pledge personal real estate next.
While your business’s cash flow is the planned source of repayment, pledging assets also shows your investment in the business. Collateral gives the lender another way to recover money if your business can’t meet its repayment obligations.
A gap between the loan amount and how much your collateral is worth doesn’t automatically rule out financing. The SBA guarantee covers part of the lender’s risk if the borrower defaults, which can make approval possible despite a shortfall. However, it doesn’t remove your responsibility to pay the loan.
Lenders assess your business’s full application. One may be comfortable with a collateral gap, while another may want more collateral or a stronger overall financial picture.
What will the loan pay for?
Once your lender understands your finances and commitment, the next question is how you’ll use the money you borrow. What you’ll need to provide will depend on what the loan is being used for:
Buying or starting a business
Your lender wants to understand your investment and, if you’re buying a business, whether the price makes sense. You should expect to provide:
- A cash contribution of at least 10% of the total project cost toward the project using your own cash. Be prepared for your lender to verify where that money comes from.
- A business valuation, which is a process that checks whether the purchase price reflects what the business is worth.
Buying, building, or improving real estate
Property purchases bring a unique set of questions about value, condition, and risk. Lender requests include:
- An appraisal to confirm the property’s value is greater than or equal to the price you are paying.
- An environmental review, whenever real estate is used as collateral, to identify potential contamination that could put your business operations at risk.
- Hazard insurance on financed property to protect the asset and the repayment source if something goes wrong. This insurance covers physical damage caused by unexpected natural disasters or accidents.
Buying equipment
Your lender will ask for a vendor quote or invoice showing the equipment, model, and total cost. These details connect the amount you’re borrowing to what you’re buying.
Working capital
Working capital helps cover the costs of running your business. Because it doesn’t buy an asset, the lender needs a clear explanation of how you plan to use the money, why you need it, and how it will support cash flow.
Know what you’re providing and why
A loan application asks a lot of you. Understanding why your lender needs each item can make the process feel more manageable and help you prepare the right information from the start. A good lender should take the time to explain what each request means for your business and for you as an owner.
If a request doesn’t make sense, ask. You should feel confident that you understand what you’re providing, what you’re committing to, and why each step matters before you sign.
When you apply with Grow America, we’ll help you understand what’s being asked of you and why, and your loan officer will be there to answer questions along the way. You don’t need to have every detail figured out before you begin. When you’re ready to take the next step, get started here.
