Preparing for a business loan can seem intimidating for those who don’t know where to begin. There’s often other felt pressure because a business wouldn’t be interested in a loan unless they needed financing to start a business venture or maybe to cover operating expenses. Preparing for a business loan can be simplified and be an easy-going process when you are completely equipped with the knowledge of what finance companies will need from you. Below are the six things you need to prepare for a business loan.
- Know the Reason for the Loan
It may seem like an obvious need. But you’d be surprised how often businesses can’t define the reason they need a business loan. This is especially true for young businesses. Business owners and their financial executives will need to outline why and how much when considering a business loan. This will be better defined when a company creates its business plan. Financial institutions will be more confident in investing in a business when they see a set plan and exactly where the loan money will be distributed.
- Review Credit History
When applying for a business loan, financiers will look into both personal and business credit history and scores. Why is credit history important? This requirement determines lender approval and interest rates. The average small business loan rates are between 4% and 6%. Personal credit scores are significant to the loan process because it allows finance companies to see if you handle personal finances well. This gives an insight into how you run your business. This is even more important when a business doesn’t have a long credit history. A personal score of 600 is the minimum, but 700+ is ideal. In truth, the better your personal credit score the better loan options you’ll be offered. Business credit scores measure a business’s ability to pay back debt. Factors that impact a business credit score are size of business, credit history length, on time payments, industry type and revenue. If your score isn’t where you would like it, you can improve credit scores by “practicing borrowing and payment practices.”
- Create a Business Plan
As briefly mentioned above, creating a business plan helps to define what finances the company acquires. What is a business plan? “A business plan is defined as a written description of your business’s future, a document that tells what you plan to do and how you plan to do it.” It’s basically a strategy on how to get your business to where you want it. This is a vital part of any business loan application. This will help you find how much financing you need, when you can pay it back and it’s required by financial institutions. Business plans showcase the collateral or assets a company wishes to secure the loan.
- Classify Your Industry
Most business loans will require an industry be selected on the application. This helps calculate the amount of risk the financial institute would incur. This is due to different industries having different levels of risk. Some lenders refuse to work with certain industries. An example of this would be house-flipping endeavors and adult entertainment. It’s important that your company’s industry is correctly identified. If mistakes are made, it will delay the application process and could even have it rejected.
- Bring Your Bank Statements
Since a loan will require repayment, lenders focus on bank statements. Bank statements are some of the most common requirements. This will tell them if a company can afford the loan with payments plus interest. It also offers an insight into how well a company manages their cash flow. Lenders will be looking for a “cash cushion” so they are confident in financing your business. Lenders will request a minimum of four months to confirm your financial stability. The bigger banks and SBA loans will require more in-depth financial statements. A good tip is to keep all business finances in its own separate location, and this can be done by opening a business bank account.
- Organize Personal and Business Tax Returns
Similar to credit scores, lenders will look at both personal and business tax returns, especially for those that are a small business. Be prepared to hand over at least two years of personal tax returns. Personal tax returns show gains and losses for those businesses that are a sole proprietorship and partnership. On the other hand, business tax returns are important if you have an LLC or a corporation. In this case, you’ll still need to provide two years of business tax returns. Tax returns allow lenders to confirm business revenues, profit and costs.
The Bottom Line
Preparing for a business loan may seem like a large undertaking but is more than likely necessary if you’re looking into business financing. Being detail-oriented and organized through this process will be the key. Lenders will need to verify a business’s financial health through bank statements, tax returns and credit history. Other items, such as a business plan, defining why you need a loan and your type of industry are also important to getting approved for a business loan.
