Many entrepreneurs lack the liquidity to pounce on time sensitive opportunities, such as acquisitions or bulk supplier discounts. A business line of credit is readily available capital to earn money or cut costs, in these ways. A well-capitalized business can also meet payroll if invoices go unpaid or emergencies arise.
There are many financing choices to meet short or long term borrowing needs. The business loan process is more efficient with basic preparation. This includes taking a lender’s perspective on what strengths and shortfalls your business may have.
Here is a checklist of what to prepare and anticipate.
2 years of Business and Personal Tax Returns
Banks prefer an established history of results. Two years of personal and business tax returns give lenders a snapshot of how your business is trending. If you own a start-up or new business strong personal credit and extensive collateral may be essential.
Lenders primarily use numbers to determine your capacity to repay. Net income, debt and credit score are closely evaluated. Loan underwriters should ideally ‘connect the dots’ to explain discrepancies.
However, high volume and limited authority may cause some aspects of your application to be overlooked. Some best practices to improve your odds of approval include:
- Determine if your business loan officer is also the underwriter. Many underwriters have leeway to make decisions on borderline applications.
- Be sure to anticipate potential questions that your tax returns may raise. Interest and depreciation expense are write-offs that lower net income. Noting this may address an underwriter’s concerns about profitability.
- Did your company have a one-time charge off or loss that deflated numbers? A busy underwriter may overlook this when reviewing your loan package. You should be aware of what factors positively and negatively affected performance. This could help you influence loan decisions.
Tip: Be prepared with alternatives based on your needs. You may use strong personal credit for a business credit card. Specific purpose loans offer easier qualifying. Examples include equipment loans and restaurant or nightclub financing offered by online lenders like BusinessLoansDirect.com.
Bank Statements for past 6 months to 1 year
Loan officers prefer ‘seasoned’ bank balances. This ferrets out borrowers who have short term infusions of cash from friends or family to improve their financials.
Tip: Anticipate and prepare for questions on spikes or dips in balances. A rational answer to a large influx of cash a month earlier will be helpful. Perhaps a large A/R was paid or you just acquired a lucrative client. You should have documentation of this ready, if needed.
Current Income Statement
Income statements are a summary of how your company is currently performing. Business dynamics frequently change. Companies may have lost large clients or market advantage since their most recent tax returns.
Tip: Prepare the most recent income statement possible, even if not favorable. Why? Lenders will recognize attempts to provide outdated information. Providing incomplete data only delays the decision and your chance to pursue alternatives.
How your assets and liabilities are comprised is important. Can your business quickly turn assets into cash? Are your liabilities short or long term? A balance sheet gives details of your business finances.
Tip: Your balance sheet also gives insight into the best loan options. For example, if you have high accounts receivable, A/R financing may be an option for short term cash. Fully depreciated and outdated machines may be incentive for equipment financing. You can increase productivity and have possible tax write offs with new equipment loans.
Business and Personal Credit Checks
Your payment history under a business tax id and/or social security number will be checked.
Tip: Minimize surprises by knowing what is on your credit reports in advance.
No credit business loans meet short term needs until credit is established. Examples of financing that require no or minimal credit includes:
- Merchant Loans
- A/R Factoring
- Niche Industry Financing
- Equipment Lending
To improve your chances of getting approved for a business loan you need to thoroughly prepare. Ask what type of documents you need before applying for a loan.
Preparing financials for a business loan has other benefits, too. You also gain perspective on making more informed decisions.
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