5 Things the Bank Will Ask When You Need a Business Loan

Owning a business is a dream to many, but it is not easy. It takes a lot of resilience, determination, backbone, and resources. Along the way, you will need a lot of help—it can be in the form of an extra pair of ears when you are brainstorming ideas, an extra pair of hands to help get things moving, or a few extra bucks for the overheads. And a business loan is one of the options available when you are in desperate need of that extra shilling. 

However, unlike a personal loan or a car loan, a lot goes into qualifying for a business loan. But that is to be expected. After all, the lender needs proof that the business is legitimate and can pay back the debt. So the bank will need to know your:

• Financial status
• Credit eligibility
• The projected success rate of the business, etc. 
  

In Kenya, you can access a business loan through banks, microfinance banks, microfinance institutions, or savings and credit cooperative societies. As a business owner, it is crucial to do thorough due diligence and understand all the facets of the loan before you commit to an institution. In addition, each institution has different requirements based on different business registration types.  

However, there are standard documents and requirements across all institutions. These are the documents that lenders expect from you and without which you are likely to have your business loan application rejected. 

1. Know Your Customer (KYC) Documents

All lenders will request the following basic information documents before your loan request is assessed: 

• Residential address confirmation. A confirmation of the business residential address(name, estate, road, and house number)  is required for all business types. In addition, confirmation of residential address for the business executives (owners for a sole proprietorship, partners for a partnership, and directors and signatories for a company) may be required. This can be in the form of a legal affidavit or a utility bill. 

• Passport-size photos.  You are required to provide passport-size photos for all the signatories and directors/known agents for companies and owners and partners for sole proprietorships and partnerships, respectively. 
• National ID.  You are required to provide copies of national for all the signatories and directors/known agents for companies and owners and partners for sole proprietorships and partnerships, respectively. 
• KRA Pin. For a company, you are required to provide KRA Pin for the company, plus all the directors and signatories. For sole proprietorships and partnerships, you need to provide KRA Pin of the owner or partners, respectively. 

2. Proof of Business Registration Status

When determining the eligibility for the loan, your business registration status is crucial to the lender. Depending on your business type, this document provides proof to the lender that you set up your business correctly and helps them determine what loan types you qualify for. 

Business permit 

In Kenya, it is a legal requirement for all businesses to acquire a business permit from a county government. Business permits regulate the safety, structure, and appearance of the business community. As such, it proves to the lender that you are conducting a legal business that follows the community guidelines. 

Certificate of Registration

For sole proprietorships and partnerships, a certificate of registration is requested when applying for a business loan. Both a sole proprietorship and a partnership are not separate legal entities. As such, the business is not separated from its owners during the application process - it is treated as the same entity with the owners or partners. 

As such, the owners or partners are liable for all the business liabilities - this is an important distinction that further determines what loan type your business can qualify for. You need to bear in mind that in the event of a default for this business type, your personal assets can be used to recover the outstanding amount.  

Certificate of Incorporation & trade license

For Limited Liability companies, a certificate of incorporation is required upon loan application. A company is a separate legal entity and has legal rights and responsibilities. As such, it is treated as a separate entity from its owners - the company is treated as a separate entity from its directors/shareholders. In the event of default, your personal assets may not be seized to recover the owed amount - this is unless they were used to guarantee the loan, which may happen in some instances. 

3. Proof of Business Viability and Demonstration of Stable Cash Flows

The main concern for many lenders when it comes to approving business loans is the business cash flow (or the ability to pay). In other words, does your business generate enough income to repay the loan within the stipulated time? 

To determine this, the lender will ask you to present the following documents with your application to help gauge the status of your business cash flow. The documets sought are dependent on the business category. 

Complete/Audited financial statements

Financial statements show a complete picture of the financial standing of the business. The Balance Sheet shows all your business assets, liabilities, and capital, while the profit and loss statement will show a picture of your current year’s income and expenditure. 

An audited report gives the lender assurance that the report is factual beyond a reasonable doubt. 

Whether or not this report is requested depends on the level of your business. For a business with an annual income of above Ksh 5M, you will be required to provide an audited report for the previous three years. 

Complete details of accounts payable and receivable (demonstration of stable cash flows)

The lender will request a detailed list of your payables and receivables, including aging and account-by-account information. A detailed receivables list shows the lender, your business sales, and your payment history. 

On the other hand, a detailed payables list gives the lender an idea of your debt repayment behavior. Sometimes the lender will even request credit references from some of your creditors just to understand more about your repayment behavior. Again, this requirement is dependent on the lender and the level/scale/type of your business. 

Bank Statements

Bank statements provide another concrete proof of your business’s financial standing. In other words, the transaction summary on the bank statement gives a fuller picture of the business financial profile and verifies what you say on the application. A lender can identify general financial conduct through spending habits, debt obligations, bills, and regular income.

Annual returns

The lender may request annual returns for companies registered more than one year ago. This is another way for the lender to verify what you say on the application.

Tax compliance certificate

A tax compliance certificate (TCC) confirms that your tax matters are in order. It means that you have complied with tax law regarding faithfully filing your returns and keeping up with payment of all the taxes due. Again, this is dependent on the lender and business registration type. 

4. Demonstration of Future Business Viability

The lender wants to ensure that you can repay the loan, hence most lenders will want to see your business:

Projected Income Statement, Balance Sheet, and Cash Flow Statements for the duration of the facility

In addition to audited financial statements, bank statements, and other historical documents, the lender might require you to provide future financial projections depending on the business type. 

These include projected reports of all the main financial reports like Balance sheet and Income statement. 

This is mainly applicable for limited liability companies, but it can also be among the requirements for partnerships and sole proprietorships. 

Breakdown of total project cost and financing plan

When applying for a loan for a specific project, you might be asked to provide an analysis of the entire project costs and a projected financing plan. This can help the lender determine the right loan amount and terms for you.

This can apply to all business types. When presenting this report, ensure you accurately reflect your projects’ finances, goals, and other relevant information.

5. Loan Guarantee/Security

A business loan can be either secured or unsecured. Unsecured loans are often given to business owners without tangible assets. However, the bank has legal recourse if the business defaults on a loan.

On the other hand, a secured loan is issued upon surrendering a business asset to the lender. In case of default, the lender has full legal rights to dispose of the asset to recover their money. 

All your personal financial details (including bank account statements etc.)

When applying for a business loan as a sole proprietorship or a partnership, the bank/lender will ask for the personal financial details of all the owners or partners. 

This is because these two types of businesses are legally treated as the same entity with the owners, and therefore the lender needs to verify the owner’s financial standing. 

This might not be a requirement for limited liability companies unless the shareholders or directors provide a personal guarantee. 

Guarantors

When applying for a business loan for any type of business, most lenders require you to provide a guarantor. This is someone who can vouch for you and your business in case of loan default. 

The lender might request that you provide a personal guarantee for limited liability companies as the business owner (or the company directors). This guarantee makes you, as the guarantor, personally responsible for the business debt if it goes into default.

Collateral

Even if your business financial history fails to secure a business loan, you can still get financing by submitting collateral. Collateral is an asset you put as a guarantee to the loan, and in case you fail to repay, the bank can sell it to repay the loan. Collateral can be in the form of land, motor vehicle, equipment, or inventory.  

In most cases, the lender will match the loan with the collateral’s value.