It is essential that the decision to apply for a loan is based on a certain business objective. Consult business development specialists, financial advisors, accountants and others to make sure that the amount of the loan and the type of the loan will be the right ones to meet the business objective. Look for the best deal available. It is important to establish and maintain the “banking relationship” with both private and public sector lenders. Select a commercial lender you are comfortable with and establish a solid relationship from the beginning. Lenders are more favorable to extend credit to businesses that are well-known in the local business community. Do the research on small business lending process and different loan programs.
Before you approach a lender for a loan, you will need to understand the factors the bank will use to evaluate your application. The five things a lender is typically going to be concerned with (these may vary by lender) are: character (stability, and good record of paying your bills on time), collateral, capital/equity, capacity/ability to pay back, and condition (outside circumstances that may affect borrowers financial situation and ability to repay). Some lenders develop their own loan decision “scorecards” using aspects of the 5 C’s and other factors.
The following are typical items required for any small business loan application:
- Loan application form – Forms vary by lender but they all require similar information, including how the loan proceeds will be used (list the assets to be purchased and suppliers).
- Personal credit report – Lenders will obtain borrowers’ credit reports, but it is highly recommended to order one’s own credit report from all three major consumer credit rating agencies before submitting the loan request to the lender. If there is inaccurate information on the report, work with creditors and credit reporting agencies to correct the information. If there are derogatory entries on the credit report that are accurate, submit a formal letter with your loan application explaining the blemishes on your credit report.
- Business credit report (for existing businesses)
- Income tax returns for three years – personal and business
- Personal financial statement of owners owning 20 percent or more of the business
- Business financial statements (for existing businesses) – complete financial statements for the past three years and current interim financial statements
- Bank statements for the last 12 months – personal and business
- Accounts receivable and payable aging breaking A/R and A/P into 30, 60, 90 and past 90-day old categories (the same date as interim financial statement)
- Collateral – A description (schedule) and cost/value of personal or business property of owner(s) or co-signers to secure the loan (appraisals may be added)
- Resumes of owners and officers – (some lenders demand relevant managerial experience in the field for start-up businesses)
- Business plan, including complete set of projected (pro-forma) financial statements – income statement, balance sheet and cash flow statement for at least three years; first year must be presented on a monthly basis
- SBA documentation – All SBA loans will require a business to submit certain SBA forms; see: sba.gov/category/type-form/lending-forms.
- Legal documents – There are a variety of legal documents that may be requested by the lender; some of the typical examples are as follows: articles of incorporation, lease agreement, contracts, franchise agreement, employment contracts, etc.
Miscellaneous information – The borrower may be asked to submit additional information that lender deems appropriate, for example, list of trade creditors, letters of reference, description of the economic impact (e.g., job creation) from the requested loan, etc.