Regardless of your type of business, you'll likely need financial support to maintain your operations at some point. This means that you will have to go to different lenders to obtain a business loan that complements your working capital. Up to 40% of business owners do so each year. Make sure you have a detailed and accurate business plan; some lenders may want to know the purpose of the loan and how you plan to use it to increase profits. In addition, adding the plan to your application helps your company stand out from other applicants.
What assets, liabilities and equity do you have? These details are essential for lenders to determine the value of your company. So, be sure to prepare your balance sheet before applying for a small business loan. Keep your liabilities low, especially with credit cards and lines of credit. A good credit card balance should be approximately 10% per account. Even so, you can get quick approval for a business loan if you have assets that support your debt.
In any case, it helps to maintain a convincing balance sheet. One of the first things overly optimistic entrepreneurs discover when looking for funding is that banks don't finance business plans. In their defense, it would be contrary to banking law if they did. Banks handle depositors' money.
Would you like your bank to invest your checking account balance in a start-up? I wouldn't. Therefore, your company must have solid assets that you can promise to support a business loan. Banks carefully examine these assets to ensure that they reduce risk. For example, when accounts receivable are committed to supporting a business loan, the bank will check the main receivables to ensure that those companies are creditworthy; and it will only accept a portion, often 50 or sometimes 75%, of the accounts receivable to support a loan. When you apply for an inventory loan, the bank will only accept a percentage of the inventory and will first remove a bunch of tires to make sure it's not an old, obsolete inventory.
The need for collateral also means that most small business owners have to pledge their personal assets, usually home equity, to obtain a business loan. There are exceptions, but the vast majority of business loan applications require a business plan document. Nowadays, it may be brief, maybe even a one-page business plan, but banks still want that standard summary of the company, product, market, team and finance. The balance sheet must include all of your company's assets, liabilities and capital, and the most recent balance sheet is the most important. Your profit and loss statements should normally be at least three years old, but sometimes exceptions can be made if you don't have enough history, but you have a good credit history and assets as collateral. You'll also need to provide any profit and loss history you have, up to three years ago.
Reviewing account statements is much cheaper, more like a thousand dollars, because the public accountants who review your statements have a much lower responsibility if you make a mistake. Banks don't always require audited or even revised statements because they always require guarantees, i.e. assets at risk, so they care more about the value of the assets you want. Tim Berry is the founder and president of Palo Alto Software, co-founder of Borland International and a renowned expert in business planning.
He has an MBA from Stanford and graduated with honors from the University of Oregon and the University of Notre Dame. Currently, Tim spends most of his time blogging, teaching and evangelizing for business planning. No thanks, I prefer to write 40-page documents. Lenders and loan programs have unique eligibility requirements.
In general, eligibility is based on what a business does to receive its income, the nature of its ownership, and where the business operates. Normally, businesses must meet SBA size standards, be able to pay, and have a strong business purpose. Even people with bad credit may be eligible for funding for startups. The lender will provide you with a full list of the eligibility requirements for your loan. When learning how to apply for a small business loan, it's also vital that you understand the requirements and conditions of such loans.
Whatever the case, your qualification and bank statement must be convincing enough to qualify for a business loan. The larger your business, the more likely you are to have audited statements prepared as part of the normal course of business, for reasons related to ownership and reporting responsibilities. All business loans require you to submit a long list of documents to show that your company can manage debt. If you're planning to expand your business or upgrade your equipment, you're probably considering the Small Business Administration (SBA) loan program.
Otherwise, make sure you understand the essential requirements of different lenders for business loans and that you prepare documentation before applying for any business loan. This includes most of the same information as accounts receivable and, in addition, they will want credit references, companies that sell your company on account and that can attest to your payment behavior. You can use the guidance provided in Bankrate's guide to writing a business plan to help you get started or hire a professional writer to create a business plan for your company. Gather all of the business incorporation documents and licenses you received from the state or local government when starting your business.
An exception to the rule is that the Federal Small Business Administration (SBA) has programs that guarantee a portion of the initial costs of new businesses so that banks can lend them money with the government, reducing risk for banks. SBA-guaranteed loans range from small to large and can be used for most business purposes, including long-term fixed assets and operating capital.
