How to Fill Out a Loan Application

When it's time to ask for a loan to kick your idea into existence, the loan application – usually a standard form from your lender – is something you simply do not want to botch.

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It takes money to make money, or so the old adage goes. Many entrepreneurs launch businesses with their personal savings, by running up their personal credit cards, or by borrowing funds from friends and family. If you want to avoid these means of raising capital, you may choose instead to go to a bank. Lately, however, banks have been exercising much tighter restrictions on lending. In this environment, then, the loan application – usually a standard form supplied by your prospective lender – is something you simply do not want to botch.

The process of applying for a loan typically takes two to three months, from the time you begin applying to the time the bank approves or rejects your loan application. When approaching a lender, it pays to be meticulous when you fill out your forms, and to provide ample documentation and back-up. You should also plan on answering a series of questions both about your business and about your personal financial situation. Here's what you need to know.

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Filling Out a Loan Application: Before You Get Started

Chances are, you'll fill out several loan applications in a bid to get money. At the outset, you'll want to consider whether to target large national institutions with whom you might do other banking, or small, community-based organizations that might be kinder to local entrepreneurs in this economic climate.

In either case, before beginning the application process, make sure you personally have good credit. What prior debts, if any – including both business and personal  – do you have? Will they affect your ability to maintain a consistent payment schedule? "How you manage your personal finances is very reflective of how you might be able to manage business finances," says John E. Clarkin, a professor of entrepreneurship at the College of Charleston, South Carolina. "That includes your personal credit."

One area where many would-be entrepreneurs are tripped up: Having too much personal credit. If you carry several credit cards in your wallet, each with a high level of available credit, a bank may worry that you are a threat to run into more debt by using that extra credit if the business runs into trouble.

After you make certain that your personal financial situation will not be a barrier to borrowing money, it's time to make a plan for how you will position yourself and your business idea. Ask yourself these questions: Precisely why do you need a loan in order to start or to expand your company? How will you spend the money? If you intend to buy inventory or equipment, from whom will you buyt it? Who at your company will manage the loan, if not you? Having a game plan to tackle these questions will make the process of filling out a loan application easier.

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Filling Out a Loan Application: The Basics of the Form

Most loan applications start with the basics: Asking your business name and phone and fax numbers, as well as the legal structure for your business (LLC or S-Corporation, for example), and the date of incorporation. If you are just starting a company, you should meet with an accountant to determine your method of incorporation ideally before you go to the bank.

The next few questions on the loan application will inquire as to the "type of business" you run. For starters, you'll need to know just how your business is covered under the North American Industry Classification System, commonly referred to as the NAICS code. (To learn more, go to the Census Bureau's website, http://www.census.gov.) Then, under "description of products and services," you should include a pithy explanation of what your business does. There's no need to be long-winded, but it makes sense to explain exactly how you make money—your sources of revenue, a phrase describing products, the sorts of customers you have, and what your typical deal or sale looks like.

For the next section, on finances, you'll enter your current bank account information, including your account number and recent deposit information. For gross annual income, list your business's income for the year. And remember to stick to your current numbers: You should enter the income earned in the past year, not your expected income in the future. The same goes for the number of employees, cash balance, debt payments, etc. You'll want to check with your accountant or financial advisor before listing your fiscal assets and deciding on a fiscal year-end, since that can vary depending on what type of company you are.

The next question on an application is often: Are you in good standing with your secretary of state? Basically, the bank wants to know whether you have paid your business taxes for the past three years. If yours is a new entity, check with your secretary of state to make sure you are properly registered and in good standing before checking this box.

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Christine Lagorio

Christine Lagorio is a writer and reporter whose work has appeared in The New York Times, The Washington Post, The San Francisco Chronicle, The Village Voice, and The Believer, among other publications. She is executive editor of Inc.com.

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