October 28, 2021

Business Loan Verification: Why It Matters to Lenders

Author

FF

Fora Financial

Staff

Tags

• Business Finances

• Small Business Loans

Not only that, but business lenders also face strict regulations on whom they may lend to. In fact, the Office of Foreign Assets Control keeps a list of individuals that lenders can’t provide financing to. Lenders use the identity verification process to avoid running afoul of this list and losing their license or charter.  In short, without verifying your identity, income, and credit history, business lenders simply couldn’t do business.  Because it’s such an important part of the application process, you should familiarize yourself with how loan verification works. In this post, we'll review what the verification process includes and how it affects your ability to qualify for business financing. 

What’s Verified During the Business Loan Verification Process?

Generally, your lender’s goal during the verification process is to verify three crucial factors:

1. Your identity
2. If your business is legitimate
3. Your income and debt levels

Regardless of the type of loan that you apply for, any legitimate lender will want to evaluate these factors. In the next few sections, we’ll review exactly what documents that lenders use to verify each of these three factors. The order and nature of the business loan process steps will vary, but this is how lenders generally verify a loan.

1. Your Personal Identity

Typically, online lenders use these documents to verify your personal identity during the loan process:

• Social security card
• Driver’s license
• Proof of legal residency.

In addition to verifying your identity, these documents allow lenders to pull your business and personal credit scores. In most cases, your credit history will be evaluated during the verification process. If you have poor credit, it may be better to improve your scores prior to applying.

2. The Validity of Your Business

To ensure your business is legitimate, business lenders may need to see your business license and your EIN or LLC number. These documents allow lenders to verify the structure of your business and whether you’re compliant with local licensing requirements.  Your business structure is important to business loan lenders, especially when collateral is involved. This is often the case because different business structures provide varying levels of asset protection. For instance, if your collateral assets are protected, the loan is safer for the lender.  Similarly, not having the correct business license could cause your business to be shut down. If your business shuts down, it will impact your ability to repay your loan amount. Therefore, lenders need to confirm that you have the proper licenses.

3. Your Income and Debt

Lenders must verify that small business owners can repay their term loan on-time. If applicants have a long history of unpaid debts, this will indicate that they likely will struggle to repay another loan. Even if they can qualify them, they will likely be given higher interest rates and smaller loan amounts. To verify your income, lenders use the following documents:

• Bank statements
• Tax returns
• Credit card processing statements (in some cases)

The amount of income documentation you’ll need to provide generally corresponds to the length of your loan term. For instance, a lender offering a 10-year loan will want to analyze your long-term financial performance. In comparison, a lender offering a 1-year loan won't require long-term data. Therefore, the lender of the 10-year loan will generally require bank statements over a longer period.  With other financing options, such as merchant cash advances, the lender may only require business credit card statements. Or, if you apply for invoice factoring, the financing provider will require that you submit invoices to verify your financial standing. Your existing debt load also affects your ability to repay your balance. Due to this, lenders must review the documentation for any other loan or line of credit you have. While they can see these loans on your credit report, lenders will still need your loan documents for verification. 

How Verification Impacts Your Ability to Qualify for Financing

Simply put, if you don't meet your business lender’s minimum criteria, you’re unlikely to qualify for financing. Unlike your business plan, your income, debt load, and your business structure are all black and white.  You either generate enough revenue to meet your lender’s minimum criteria, or you don’t. Your collateral is protected by your business structure, or it’s not. In short, the verification process can make or break your ability to qualify for a business loan.  Of course, it's frustrating to apply for a business loan and have your application get declined. However, you may be able to get approved for financing in the future. Reach out to your lender and find out why they couldn’t provide you with a loan offer. Once you know what went wrong, you can work to improve that aspect of your business finances.

Conclusion: On Business Loans With No Verification Process

The reality is, no business lender will originate a loan without verifying the borrower to some extent. When you see lenders advertise business loans that don't require verification, understand that you’ll still be asked for basic documentation. In other cases, loans that don't require verification may be more expensive, or come from lenders that aren't as legitimate. Also, keep in mind that the verification process isn't your enemy. It’s in your best interest to be prepared for the process and responsive to your lender throughout. If your application is on the fence, professionalism and attention to detail can be a determining factor.  Plus, alternative lenders are increasingly using technology to make the verification process faster. So, if you work with an alternative lender, you can generally expect quicker verification that requires less paperwork.  Just remember, always be honest and thorough during the verification process. At best, any discrepancies in your documents will mean your application is delayed. At worst, discrepancies will cause your loan application to be automatically denied.  Before you apply for a business loan, be sure to review this post to ensure that you meet these common requirements. Of course, your application could still be declined for other reasons, but this is a good starting point as an applicant!

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