How to Prepare for Your Small Business Loan Application
When seeking a small business loan, it’s a good idea to be prepared before you start the business loan application process. So what are common mistakes, best practices, and the documents that you’ll need?
Common Mistakes & Best Practices
Common mistakes entrepreneurs make when submitting documentation are providing incomplete tax returns (often lacking the required schedules) and incomplete or erroneous personal financial statements, says John Seelinger, a mentor with the Orange County, California chapter of SCORE, a nonprofit organization that mentors and educates small business owners and startups.
How your use case matters
Whether you are seeking a loan to start a business or already have a successful business, the documentation required doesn’t vary much, Seelinger says. “However, the underwriting criteria might be different. For example, a novice startup entrepreneur might have to put up collateral in excess of the loan amount, while an entrepreneur with a solid history might be able to get by with collateral less than the loan amount.” In both cases, Seelinger adds, if a guarantor—typically a spouse—has enough income to cover living expenses and all or most of the proposed debt servicing, less collateral may be required.
Do your research first
If you’re hoping to get a loan from a bank, before submitting a loan request, Seelinger recommends speaking to each bank’s regional business center to find out how they view lending to startups, to companies in your industry, or any other parameters. “Some banks won’t lend less than $100,000; others will only lend to companies with revenues of at least $250,000; some will not lend to certain industries,” he explains. By “interviewing” the lender to learn their underwriting standards, you’ll avoid wasting time submitting an application that’s likely to be rejected.
Complete your small business loan application as soon as possible
Once you find a potential lender, Seelinger says, ask exactly what documents they want, then complete and submit everything promptly. “If documents are submitted piecemeal, the entire approval process slows down,” he says. “Inevitably, the underwriting process will generate questions, and the bank will request clarification or additional documents.” Provide them as fast as possible so you don’t delay your loan approval or cause the bank to reconsider.
By knowing what a lender wants, getting your documents in order and providing them quickly, you’ll improve your chances of getting that much-needed business loan. So what documents do you need?
Although the documents you’ll need to submit will vary slightly depending on the type or size of the loan you’re seeking, and your length of time in business, in general most lenders will want to see the following documents.
This includes any prior names you have used, your previous addresses and your educational background—similar to what you’d provide on a job application. You may also need to provide a resume that explains your work experience.
“[For] startup entrepreneurs with no entrepreneurial experience, lenders will want to see proof of strong managerial responsibilities and experience—preferably with a small business, despite not having been the owner,” explains Seelinger.
Your Business Plan
You’ll need a business plan when applying for a loan of $150,000 or more, says Seelinger, who is currently Chair of SCORE’s Client Finance Committee and spent 32 years in commercial banking. For a smaller small business loan, a business plan may not be required—“although the submission of one conveys seriousness and would be a plus,” Seelinger adds. The business plan includes:
- An executive summary
- A market analysis that explains the opportunity and the competition
- A description of your business (what it does and what differentiates it from competitors)
- Information about the company’s operations and management, including the management team’s experience
- Your marketing and sales strategy
- The purpose of the loan
- Detailed financial projections and financial statements, including a profit and loss statement, cash flow statement and balance sheet.
Your Personal Credit Report
Before applying for a business loan, get a copy of your credit report from each of the three major credit rating agencies (Equifax, Experian and TransUnion). You can get a free copy of your credit report from each agency once every 12 months; visit the FTC website for details. Correct any mistakes immediately. If your personal credit score is above 700, you may qualify for loans from traditional banks, regardless, alternative lenders may be an option for people with all kinds of credit, both excellent and in need of improvement.
Your Business Credit Report
Unless you are a startup, the lender will also pull a business credit report. Check your credit report first through D&B,Experian and Credit.net (you’ll have to pay for a copy) and correct any errors. A good business credit score is 80 or above (on a scale of 1-100).
Income Tax Returns
Lenders generally require both personal and business income tax returns, including schedules, for the past three years.
In addition to incorporating historical and projected financial statements into your business plan, you may also be asked to submit projected financial statements separately. Typically, lenders require monthly or quarterly financial projections for the first year, then quarterly and/or yearly projections for the next four years.
Bank statements support the claims you are making in your financial statements and projections. Typically, you’ll be asked to provide both personal and business bank statements for the past 12 months.
Collateral is personal or business property that you are willing to stake against the loan. Make sure documents showing ownership of assets are properly titled and the assets are unencumbered, Seelinger says.
Miscellaneous Contracts and Legal Documents
- Business licenses and registration
- Articles of incorporation
- Leases for commercial real estate or business equipment
- Franchise agreements
- Contracts with third parties such as clients or suppliers
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