Six Fundamentals You Need When Applying for a Business Loan

Kick-off Small Business Week with the must-haves when applying for a business loan!

Obtaining a business loan may seem overwhelming, but by preparing what you need before the application process, you can set yourself up for success. Understanding what lenders are looking for and eliminating any gaps in information will make the process smoother and approval more likely.

While each loan is unique, there are certain elements required for any business loan application. These essential points will help a lender understand:

• Why you need the loan
• If you can afford the loan
• If you can repay the loan

Here are the typical items lenders might require:

1. Credit History

Lenders will look at your personal credit score to gauge your trustworthiness as a borrower as well as how you will manage your business finances. Based on your payment history, amounts of outstanding debt, and how long you have had access to credit, your credit score is one factor that determines what loans you will qualify for and what type of interest rate you will receive.

Make sure to stay up to date on your credit report and if there are any errors have them removed before applying for your loan. The credit ratings of anyone with more than 20 percent ownership in the business are also looked at, so be sure your partners have a good credit history as well.

2. The Application

This will be the introduction of you and your business to the lender. Review all of the information you provide to ensure it is complete and correct. Lenders will require documentation to verify all information.

3. Your Business Plan

Your business plan is where you will introduce the purposes and strategy of your business and layout both your financial and organizational goals. A typical plan includes a summary of your business, its organizational structure, who your customers are, what your market looks like, who your competitors are, how you will market your business, and a complete set of projected financials. This document should be as detailed as possible and prepared with the assistance of a professional. You do not need to spend a lot of money to get this done, Service Core of Retired Executives (SCORE) and the Small Business Development Center (SBDC) both have free services to help draft, review, and refine your plan.

4. Financial Statements

Bank Statements
Most lenders will require bank statements to calculate an average balance and confirm a healthy financial history. Three to 12 months of statements is typical for a loan application.

Balance Sheet
A balance sheet will provide a clear comparison of your financial assets with your financial liabilities. Your balance sheet will give a snapshot of your company’s net worth on any given date and will allow a lender to assess your ability to meet your existing obligations in addition to repaying any money they lend to your business.

Profit & Loss Statements
The Profit & Loss Statement (or income statement) reports your company’s revenues and expenses over a period of time. This statement will show your lender where your money is coming from and will prove that you have a steady cash flow. You may want to show these numbers monthly, quarterly or annually. Lenders will typically want to see both a year-to-date statement, updated within the past 60 days and statements from the previous three years.

Cash Flow Forecast
A cash flow forecast gives an understanding of your business’s potential growth and opportunity. A lender will look to ensure that your future margins will be wide enough to cover your loan repayment. While it is a forecast and things may turn out differently, you must be realistic in predicting your future value.

5. Tax Returns

In order to verify income and revenue, most lenders will want to see three years of both personal and business tax returns. Include all schedules and attachments, as these will allow a lender to quickly find an answer to any questions.

6. Collateral

Collateral is a form of security that assures a lender that if you default on the loan they will be able to recover their funding. A document detailing the value of any personal or business property that will be used as collateral to secure the loan is required for certain loans. Keep in mind that using personal assets as collateral presents the risks of losing the assets in the event that you default on the loan. Whatever you choose to offer as collateral you will need to prove its value, not just the price, and may need to hire a professional appraiser to document that value.

Taking the time to put together and organize this paperwork before you apply for a business loan will help you to secure the best loan to fit your needs. Be sure to provide the correct information across all of your documents, be realistic in your objectives and projections, and respond to any inquiries in a timely fashion. Finally, make sure you keep a personal copy of your loan package for your records. Now the only thing left is to wait for the final word from the lender.

If you have any additional questions about how to prepare your business loan application or are looking for information on a loan, contact our Business Services team at businessservices@servicecu.org. Our business lending experts are ready to work with you to understand your business situation and give you a custom plan with competitive rates and terms based upon your needs.