Small business owners know the value of preparation. Planning ahead is second nature to entrepreneurs, who are always thinking about the next step in their businesses. When it comes to business financing, preparation is key.
Contrary to the perception you may have, a business loan isn’t just for struggling businesses. Many business owners look for funding at some point, whether it’s to finance an ambitious project, meet surging demand, or occasionally cover expenses during a slow season.
Funding can open doors to opportunities as much as it can help keep the lights on when business is slow.
Funding is never guaranteed, and sometimes it can be a frustrating process that drags on. One of the best ways you can better ensure funding success is to prepare yourself for the process ahead of time, have all the important documentation on hand, and present yourself in the best possible light ahead of the application.
With that in mind, here are seven things small business owners should prepare before they ever speak with a lender:
Come up with a business plan
Many lenders (and the Small Business Administration, which partially guarantees generous loans through traditional lenders) require you to submit a business plan with your loan application.
Regardless of whether it’s required, a formal document outlining the goals of the company, the state of the market, financial projections, and what you plan on doing with your infusion of funding is always good to have at the ready. If you can’t explain to yourself why you need a loan and what you want to do with it, you likely won’t convince a lender.
You should always have a specific investment in mind for your loan—maybe you want to upgrade to a new piece of heavy machinery, for example—and this would be the place to include a quote or other information about what you’re investing in, and why.
Know your business and personal credit scores
Virtually every reputable lender will want to see your credit scores—personal and business (if you have one). And while great credit isn’t a requirement for all loans, excellent credit will make approval much more likely and can also help secure better terms on your loan.
Take the time to request and review your business credit report as well as your personal reports. If either score is low, consider taking a step back and figuring out how to boost your numbers before you apply for a loan. This is also a great time to deal with any errors on your reports.
Gather your business financial statements
Again, every lender will likely want something different, but you can be sure you’ll be asked for a variety of business financial statements. Prepare to hand over your business tax returns from the last few years (if available), as well as cash flow statements, balance sheets, bank statements, and a business debt schedule.
Hand in your personal financial statements, too
Your personal financial background is just as important to lenders as your business’s finances. Two or three years’ worth of personal tax returns is standard for anyone who has more than a 20% stake in the business.
Show proof of ownership
Typically, business tax returns function as proof that you own your business. But if you don’t have access to tax returns for whatever reason—perhaps you have a new business and you haven’t had to file yet—you can also provide a business license or articles of incorporation.
Figure out if you will offer collateral
In this context, collateral is an asset (such as real estate or equipment) that a borrower can use to “secure” their loan. Loans can either be secured or unsecured, and unsecured loans might come with higher interest rates to compensate.
Collateral isn’t required for all loan products—it depends on the kind of loan you’re looking for, your credit history, and your lender. But if you have collateral and are willing to offer it as a means to bring down your interest rate, you should be ready to bring proof of it to the table.
Provide zero balance letters
Perhaps this isn’t your first time taking out a loan. Typically, lenders don’t want to be second-in-line while waiting to be paid back, and they’ll want proof that you don’t owe other creditors. A zero balance letter from your past lender(s) will show that you’re now free and clear, easing any worries about collecting on a default.
Put your best foot forward
The bottom line is that your business will be under comprehensive review. Approach financing like your business is interviewing for a job—you want to put your very best foot forward and try to predict any curveballs. The more prep you do ahead of time, the better off you’ll be when a lender is deciding if you’re worth their investment.
These views are made solely by the author.
