Mark Twain said, “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”
What this really means is that it’s relatively easy to get a loan when you don’t need the money, but considerably more difficult when you do. If you’re applying for a commercial loan, the best way to ensure that your loan application is approved—and that you’ll get the best terms possible—is to prepare well in advance of submitting the application. The sooner you start, the better the position you’ll be in. Here are the steps you need to take:
Get your financials in order. When you submit the application, you’re usually required to provide three years of financial information.
- Profit and loss (P&L) statements detailing income and expenses. You may also need to provide an interim statement covering the past 90 days.
- Balance sheets showing the company’s assets and liabilities.
You’ll also need to make financial projections of income and expenses for three years (the first year on a monthly basis) as well as schedules of:
- Debts owed by the business (amounts, due dates).
- Aging accounts receivable, broken down into 30, 60, 90 and 90+ days past due.
To ensure that your financial information is up to loan standards, employ good business practices.
- Handle debt wisely and do not take on too much borrowing that will weigh down the balance sheet.
- Stay on top of cash flow so you can pay your bills when they come due.
Work with a knowledgeable financial advisor who can review your financial statements now and make recommendations on steps to take for improvement.
Check on credit scores. Small-business loan approval depends in part on the credit standing of both the business and its owners. Owners’ credit scores are vital because SBA loans require every owner with at least a 20 percent interest in the company to give his or her personal guarantee for loans made to the company.
- Business credit scores. Business credit monitoring companies, such as D&B, track credit information. The better the company’s credit record, the more likely the bank will grant the loan because it will be confident about repayment.
- Personal credit scores. The owners’ personal credit histories are tracked through the three consumer credit bureaus: Equifax, Experian, and TransUnion. Individuals can check their credit for free each year through AnnualCreditReport.com. However, credit scores provided by FICO, a private rating company, are not part of this annual report and obtaining a personal credit score annually is not free. Banks may set their FICO score requirements for loan approval (e.g., say 680 and above). This threshold may be flexible, depending on the business’ credit rating and other factors.
Write a winning business plan. The bank wants to know what you’re going to do with the loan proceeds and how you expect to repay the loan. Whether you need a formal business plan or an informal business proposal depends on the lender.
Writing a business plan and keeping it up-to-date is a good business practice, whether or not you need the plan for the loan application. If you need to write a business plan, good resources to help you include:
- Bplans has numerous free sample plans for various industries which can be adapted to your use; there is also paid software and cloud versions for crafting and maintaining your own business plan.
- SBA’s business plan template.
Test your business. One great tool to help you know if your business is ready to successfully qualify for a loan is the Business Fundability Test from BusinessFundability.com, a company I work with. This free service provides you a custom report on how your business measures up to what lenders require and what type of commercial financing your business presently may qualify for.
Like training for a marathon, preparing to submit a loan application takes considerable time and effort. This will be well worth it when it helps you cross the finish line to receiving your loan.
Read more Money stories here.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.