Whether you are a startup or a well-established business looking to expand, there are pertinent steps you should take as a business owner before approaching a financial institution for funding. Your efforts will allow them to get a better picture of your business and its financial needs, and therefore can significantly impact the lender’s perception of your organization and your chances of securing funding. Before applying for a business loan, be sure to:
Determine the amount of money you need.
Take some time to really analyze your business’s financial stance. What will the capital be used for? What is the state of the industry your business is in? Is it seasonal? What other debt do you have? Are you just starting out or is your business expanding? Who else is invested in your company? How urgently do you need funding? Knowing the answers to these questions will not only help you determine the amount of money your business needs, but will prepare you for when your lender asks these fundamental questions.
Understand your numbers.
Lenders consider the 5 C’s of credit when a borrower applies for a business loan: the character of the business owner(s), capacity (cash flow), capital, collateral, and conditions within the industry and economy. This information is used by the lender to measure the financial stability of your organization and understand your business’s ability to successfully repay the loan. Lenders will also be looking at the debt-to-worth ratio. This is the amount being borrowed compared to the equity investment the owners have put into their business. Substantial equity shows the owners are fully committed and, when combined with the borrowed capital, it ensures the business can operate effectively.
Be prepared for an online review.
Business lenders will do their homework. They will assess your company’s website, social media accounts, and reviews to ensure they are professional and positive. Do an online assessment to ensure your company’s presence accurately portrays your organization. Also, review your personal Facebook, LinkedIn, Twitter, and Instagram accounts to make sure your image will not be damaged by what you have shared with your network.
Create a professional business package.
Before submitting an application, compile the following items so your lender will have the necessary information to complete a business loan application:
- Comprehensive business plan
- Resume for each business owner
- Balance sheet, cash flow, income statement, and bank statements
- Financial projections
- Tax documents over the past three years for each of the owners and the business
- Business certificate or license
- Articles of incorporation or formation, as applicable
- List of executive officers and their backgrounds
Research lenders.
Meet with financial institutions to determine which type will best fit your business. There is an overwhelming number of choices when selecting an institution, including community banks, credit unions, commercial banks, and online financial institutions. Know what each one can offer your business. Consider banks with a community connection that know the market and the region’s strengths, and are vested in the local economy. Be sure to also research the lender you will be working with. A suitable commercial lender will learn about your business or industry and will be able to guide you through fundamental questions such as when to add capital, when to grow, and when to add capacity against demands.
Understanding what lenders will review and analyze will increase your chances of a smooth loan application process. Business loans are available to help your business expand, conduct new research, fund marketing efforts, hire new employees, move into new territories, and much more. No matter the reason, lenders want to help you achieve success. They are available and willing to be a resource as you look to grow your organization.
