Looking to grow your business? A business loan can help--whether you're looking to expand your product line, make another hire, or keep the lights on until busy season. There's a reason that almost 9 in 10 small businesses carry debt, according to a 2013 study by the National Small Business Association: it's an important part of running a business.
But applying for a business loan is notoriously hectic and time-consuming, and nothing is guaranteed. As a busy entrepreneur, you don't need anything else to worry about.
To help set you up for success, we break down the business loan application into 2 parts to make it easier to understand.
Let's take a closer look.
Part 1: Build Up a Case for Your Business
The first big question lenders will want to answer is:
What's going on with your business?
Before you send out any applications, you should prepare all the documents, forms, and numbers that will explain what you do--and prove that you're doing it well.
Most lenders will want to feel confident that they're lending to a reputable, legitimate, well-planned business, run by an entrepreneur who keeps records and plans ahead. The better they feel about you and your business, the more likely it is those lenders will loan you money at better terms (or at all).
For example, you'll almost definitely need a photocopy of a government-issued identification card--like a driver's license or passport--just as a baseline. You also might get asked for your business licenses and proof of ownership, a franchise agreement (if you run a franchise), the number of employees you have (to get a sense of your size), your business's entity type and industry, and more. You may want to prepare your business plan, too, if you think it will show off your entrepreneurial skill set, as well as your personal resume.
A great loan application tells a story. What's the story behind your small business?
Part 2: Prove You Can Take On a Loan
This is just as important--for obvious reasons. Lenders will also want an answer to another question:
Will you pay back your loan?
Your job is to convince lenders that the answer is "Absolutely yes."
Your Business Finances
In order to show lenders that your business can handle the debt, it's a simple matter of gathering all the right documents in one place.
For the most part, lenders may want your balance sheet, bank statements, recent business tax returns, and recent profit & loss statements. These financials will illustrate how you manage the money that goes in and out of your business.
Plus, you may also need to provide documents that break down your other business debts. For example, rent/real estate schedules, business leases, a business debt schedule if you have one, your accounts payable statements that breaks down what you owe vendors, and so on will all help lenders understand whether or not you can pay off a loan.
Finally, lenders may want some insight into your collateral valuations for any real estate, equipment, or inventory. After all, if you are unable to repay your loan, they'll want to be sure that they can recoup their losses somehow.
Your Borrowing History
When you're applying for a small business loan, lenders will care a whole lot about you as a person.
That's why they might ask for personal tax returns: to check out your personal financial situation. If you can't manage your household, why should they trust that you'll manage a business loan?
All lenders will also want to see your personal credit score. This three digit number represents how reliable you've been as a borrower: with your credit cards, mortgage payments, student loans, etc. It's so important in your business loan application that you might want to consider improving your score before applying, in order to qualify for the best loans out there.
And one more thing: the longer you've been in business, the better for your application. Only 50% of small businesses survive for 5 years, and only a third make it past 10... So if you've been in business for less than two years, it might be harder to find an affordable loan.
In short, lenders want to know why you need a business loan and how you'll be able to pay them back. Make sure your case is airtight by proving that you're running a smart, successful business that can use those extra funds to grow--and that you'll repay your loan on time, in full, without a question.
Satisfy these two parts of the loan application and you're much more likely to qualify for the financing you want. Depending on the type of funding you're looking for, it might take some time and effort, but the right loan could seriously help you push your business forward.