1. Credit Reports
Your business must be able to demonstrate a track record of repaying loans in whole and on time in order to have access to more funds.
Although negative credit won’t preclude you from receiving a loan entirely, it will almost likely result in higher interest rates or smaller loan amounts from online lenders. In certain cases, they may ask for collateral to secure the loan.
Your company’s structure will define the differences between your personal and business credit scores. In general, it’s a good idea to try to form a separate legal organization for your business (LLC, Partnership, Corporation, etc.). This manner, factors like prior student loan late payments won’t affect your capacity to borrow money as a business owner.
Starting with a credit report from one of the credit agencies, such as Dun and Bradstreet, is a smart idea. If you have a good credit score, you will most likely be a good loan recipient, increasing your chances of being approved.
Before submitting your application, you may correct any inaccuracies in your report. If you have a low credit score as a consequence of business credit card debt or other financial issues, you should concentrate on improving it before applying for a loan.
2. Accounts Statements
Most small business lenders will want to see your company’s bank account statements throughout the application process. They can help you defend your future cash flow estimates and check your company’s legitimacy.
Lenders are significantly more likely to lend to businesses that they believe are actively creating revenue while keeping an acceptable degree of expense control. As a consequence, your financial statements must reflect this reality.
3. Return on Investments
Your business’s income tax returns may reveal how well it has performed in the past. If your business is still in its infancy, you should contact your accountant for help generating an estimate of your tax returns for the next year.
When filing your taxes, it’s critical to strike a balance between maximizing deductions and maintaining the impression of regular income. While writing off a large portion of your taxes might help you save money each year, having too many tax deductions can raise red flags with potential lenders.
4. Statement of Profit and Loss
Your income statement summarizes how your business has dealt with cash flow in the past. In general, the revenue and expense columns on an income statement will be clearly divided.
For business lenders who want to know how a firm fared the previous year, income statements are very important (s). Even if your expenditures exceed your revenues, which is normal for small businesses, all types of lenders will want to review your income statement.
5. Accounts Receivable
A balance sheet and an income statement differ in a number of ways. Your balance sheet depicts your current financial situation, while your income statement is a review of your financial history.
The financial components of your organization will be shown on a balance sheet, such as:
- Right now, there are a few assets that are accessible
- Sources of equity finance
- Accounts Receivable (accounts receivable)
Each of these measures will be closely scrutinized by corporate finance lenders. The primary purpose of a balance sheet is to illustrate what your organization owns and how much money it owes. Obtaining a low-interest small company loan may be more challenging if your current debts exceed your present assets.
6. Projection of Budget and Cash Flow in the Future
When reviewing you for a loan, lenders will want to know how your company plans to utilize the cash and what your goals are. For example, business owners often use their spare operating money to:
- Make a real estate investment.
- Purchase and pay for inventory.
- Start growing your company.
- Invest in modern equipment.
- Payroll is almost around the corner.
Despite the fact that business lenders like you to be as specific as possible about your goals, your claims will be allowed some tolerance. This is because your budget and predicted cash flows are just estimations, and lenders understand that things might change.
To acquire a business loan, you’ll need to create two future scenarios. The first scenario represents how you expect your business to operate in the absence of additional cash. The second example should show how a small business loan might help your firm improve its performance. This should convince lenders that you are a creditworthy applicant who is capable of repaying a loan.
Finally, bear in mind that the paperwork requirements may vary based on the kind of business loan you’re looking for. A business line of credit or a merchant cash advance may have different requirements than a traditional loan. Furthermore, obtaining a bank loan usually requires additional documents.
Furthermore, each lender’s paperwork requirements may vary, and may include corporate licenses and other papers. If you seek for an SBA loan, you must fulfill the Small Business Administration’s standards.
Overall, you must convince lenders that funding your business would benefit both sides. If you do this, you’ll have a greater chance of securing a low-interest loan.
Although there are several factors to consider throughout the loan underwriting process, having the documents listed in this article on available will surely help you.
Editor’s note: This page was updated in March 2022 to improve accuracy and comprehensiveness.