When you are applying for a business loan, knowing what to expect - and how to prepare - is crucial.
Applying for a business loan can be a daunting task. As every existing business owner will tell you, that fear of potential rejection never completely goes away, but it does get better with time. To improve your chances of securing that loan, we recommend focusing on 5 key aspects of your application.
There are specific things you can do to ensure you are ready to face the bank when applying for your business loan.
1. Business Plan, Naturally
Most banks request to see a business plan for three reasons. First, they want to ensure that your request for a loan is backed by solid financial projections which you understand. They will evaluate your Income Statement, Statement of Cashflows and Balance Sheet to determine how much funding you require to open or maintain your business and how the funding should be best used.
The second reason banks ask to see your business plan has to do with their confidence in you. Simply put, a good business plan demonstrates your knowledge of the business, the industry you operate it and your underlying business model.
Third, while lenders do typically familiarize themselves with particulars of specifics businesses and industries, your plan will serve as a general outline of your business for the bank, helping your loan officer understand your industry, and thus making it easier for them to intelligently assess the success rate of your existing or proposed venture.
2. Your Financial Profile and Credit Score
In many cases, while reviewing loan requests for new businesses without financial track record, banks will evaluate creditworthiness of their founders. Such factors as your liquid asset base (your savings), your credit score, as well as your overall assets, may play a deciding role in the bank's decision to approve or deny a business loan.
The logic is simple; your personal financial decisions directly correlate how you will make decisions as a business owner. If the business has no financial history, you are essentially becoming its guarantor, so be prepared to show your personal financial history as part of the business loan application.
3. Your Business Financials
If you are applying for a loan for an existing business, a lender will most certainly ask to see your financials. This is where it becomes extremely important to present both your business tax returns, as well as properly formatted and audited financial statements. These do not need to resemble 50-page corporate annual reports. A simple set of a few documents prepared by an accountant, however, is a must.
Of course, there are exceptions to every rule. However, our experience of developing business plans and advising entrepreneurs over the last 10 years shows that you are likely to encounter a request for these documents every time you apply for a bank loan.