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Follow our checklist’s six steps to maximize the potential of your small business loan application, and secure the financing your business needs to flourish.
Your ability to get a bank loan, as well as that loan’s interest rate and other loan terms, will be driven in part by your business and personal credit ratings—so you’ll want to know this information in advance.
Three separate companies compile credit reports:
Under Federal law, you’re entitled to a free credit report from each of the three major reporting agencies once per year. Get your free credit reports at www.annualcreditreport.com or by calling 1-800-322-8228.
Review the reports carefully and look for inaccuracies. If you see an error, you have the right to have it corrected. Notify the relevant credit reporting agency within 30 days of receiving your report.
Make sure your credit report is accurate before you apply for a small business loan to avoid any missed opportunities or sticky situations.
All three major credit rating agencies use the FICO system for scoring credit ratings, which follows this rubric:
The process of assembling all of the necessary business documents and disclosures for your small business loan application will take a lot of time and energy. So that you can be ready to move quickly once you start working with lenders, you should assemble all of those documents before you start applying for a loan.
Some of the documents will need to be notarized, and others must be originals rather than photocopies. You’ll want to check with your lender or lenders about their specific business loan requirements to that you can take care of these in advance.
Document requirements vary from lender to lender. You might have one or two unexpected requests, but if you’re prepared with the following documents, you’re most likely covered:
Read the Loan Agreement very carefully before signing it. Pay particular attention to the terms relating to the annual percentage rate (APR) charged for the loan.
Also, be very clear on late payment penalties and any term that allows for acceleration of the due dates for payments, as well as any prepayment penalties!
It’s essential that you understand the terms of the loan agreement. If you don’t feel absolutely comfortable, consider getting legal counsel.
Answer the initial qualification questions. The business loan application might ask about prior criminal convictions, recent denials of credit, bankruptcy filings, or late payments on other loans. Be complete and honest on these issues—lying might help your loan terms in the short run, but you’ll get found out, and the benefits aren’t worth the consequences.
Complete the Information section of the loan application, which typically features:
Also be sure to include your business history. This contains the year your business was established and business’s form (sole proprietor, partnership, LLC, or corporation).
The application will usually request personal financial information like your net worth, real estate owned, and so on—especially if the loan terms provide for recourse against you personally.
Often the loan application will request business references in a community where you’ve done business.
Sign the form and submit to the financial institution! Also, be aware that signing and submitting the application is your authorization to the lender to conduct a credit check.
Note: Although this isn’t required by many conventional lenders, assembling a personal and business background statement is a good idea. Many lenders like to see this type of information to gauge your expertise in your industry, or to add context to your application. It’s best to be prepared just in case!
Include all of your educational degrees, certificates, and professional licenses relevant to your business.
Describe all the work experiences you’ve had before starting your business that prepared you to run your current business.
Outline the history of your business—establishment of the business entity, initial and current product lines, sales volume, gross sales, net revenue, number of employees, and so on.
Any lender will want to see two things in your financial statement:
In your historic financials, you’ll want to show a healthy (and hopefully growing) free cash flow—that is, your operating cash flow minus your capital expenditures. The free cash flow is money that can safely be taken out of your business for distribution.
Another way of looking at it is that free cash flow is your “safety margin” in business. If you have strong historic free cash flow, then your business probably is a good bet for a lender.
Being able to show good cost controls in your historic financials is a strong indicator to lenders that you run your business wisely, without wasting money.
Even better: show that you have an ongoing system for reviewing and reducing costs whenever possible. Every dollar saved on operating costs is a dollar available for debt service or free cash flow.
In your financial projections, you’ll want to use conservative estimates but still be able to show that your revenues will increase by a healthy margin above the new obligations caused by the debt.
Begin the business plan by outlining the historic structure of your business:
Next, outline the competitive structure of your market:
Finally, outline your projected business plan:
Preparing all of this documentation should give you a deep understanding of what lenders consider when reviewing loan applications—as well as greater insight into the operations of your own small business!
Remember, the best time to get a loan is before you actually need it, so if you think your business requires funding in the near future, now is the time to begin preparing for the process.
The key takeaways: