The first step to getting approved for a business loan is knowing you’re ready for one. Whether your business is booming and you want to open a new location or you need new equipment to expand your operation, there are different kinds of business financing designed to fit your need. But having your financials in order so you can actually get approved and avoid rejection is essential no matter which of the 44 different kinds of business financing you’re applying for.
Here’s a quick and dirty checklist to make sure you’re loan-ready.
1. Get your finances in order.
Before any lender would consider handing you money, you need to get your business finances in order so you can professionally present them to the lender. This means you need your bookkeeping up to date so you can provide an accurate and current income statement (also known as a profit & loss statement or P&L), balance sheet, and any other requested financial information.
This should be the easy part, as your finances should already be in order before you start looking for a loan (otherwise, how would you know you need one?!). At a bare minimum, you should have your files updated annually for tax season, which may suffice for your lending needs. However, best practices are to update your books monthly, or quarterly at the very least. An accountant who specializes in business bookkeeping should already be in your core group of business advisers — if you don’t have one already, tap into your network to get a referral from other entrepreneurs.
2. Prepare financial statements.
Now that your finances are in order, it is time to generate the reports required for your loan. As we just mentioned, those are typically a profit and loss statement and a balance sheet. If you use a popular accounting program like QuickBooks or Xero, this should only take a few minutes to complete. If you use an external bookkeeper or accountant, they should be able to easily provide these reports.
A profit and loss statement shows business revenues and expenses for a certain period of time. When I applied for my most recent loan, the lender asked for the last two years’ P&Ls for my business, which I was able to generate in a few clicks. This report shows a summary of where my income comes from and business expenses by category, with a final profit number showing how much money I actually earn from my business.
A balance sheet is a snapshot in time of the assets and liabilities of a business. Assets are made up of items like cash and equivalents, equipment, inventory and anything else valuable the business could hypothetically sell for cash. Liabilities include loans, credit card balances, accounts payable and anything else the business owes. The net of assets minus liabilities is the owner’s equity, or a conservative estimate of the value of the business if you were to shut down and liquidate assets.
3. Understand and improve your business credit.
A business’s financial reports show the business’s ability to pay back a loan, but there are other factors at play as well. A business credit score shows the company’s history with making on-time payments, managing loans and an estimated risk level that the loan will not be paid as agreed.
Business credit scores are similar to personal credit scores in that they’re designed to help lenders predict whether you’ll repay your debt. But the factors and data that go into business credit scores can be different. For example, the number of employees and age of your business are factors in your FICO SBSS score, the score that lenders use to qualify businesses for SBA-backed loans, a popular low-interest business loan option. If you don’t know your score or where to start, you can check your business credit score for free on Nav. A recent study from Nav found small business owners who understand their business credit scores are 41% more likely to be approved when they apply for a business loan.
4. Calculate what you actually need.
Before this process started, you went through some process to decide that you need a loan. If you just guessed that a loan would be helpful, it’s time to look at the hard numbers to learn what you really need for your business.
Applying for a bigger loan than needed could increase the chance you’ll get rejected and leave you paying interest on money you don’t actually need. If you are applying for an installment loan — a loan with a fixed monthly payment due every month — a smaller loan means a smaller payment and an easier path to debt freedom. If you are less certain, a business line of credit — which works more like a credit card — is a popular option for business owners as it gives you the flexibility to borrow only what you need while leaving available credit open if you get into a jam and need to float inventory or other costs for a few weeks.
5. Shop around for the best loan terms.
Now you know how much you need and have everything you need in order to qualify for a loan, but you still shouldn’t rush to the local bank and sign on the dotted line. Instead, shop around for the best loan rates possible for your business. Business owners spend dozens of hours shopping for financing because the cost of a bad loan can be fatal for their business.
For a large loan, a small difference in interest rates can lead to hundreds or thousands of dollars in interest savings. Be careful and note the details when picking your preferred lender.
6. Figure out where to apply.
It’s finally time to apply for your loan! Because you already know your credit score and have your financial information in order, the application process should be smooth and simple. Many modern online lenders give instant approval, though you may need to spend a little more time working with a loan officer to get everything finalized and answer additional questions.
Go through this process with open honesty about your business, the intended use of the loan funds, and your personal finances if the lender asks. The faster you reply with accurate, clear information the faster you will get your response. If you have a solid business and loan application, you should have no problem getting approved.
Looking to establish business and corporate credit for your company? Credible Concepts can help? Contact us today to learn more about establishing credit for your business. Obtain a free business credit report from Dun and Bradstreet and Business Experian during your consultation!