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Preparing for a Small Business Loan: A Checklist

Guest blog by Samantha Novick of Bond Street 

A small business loan can be a powerful tool for growing your business, or just meeting day to day expenses. Deciding that you need a loan may be easy but the real challenge is making sure you're ready to apply for financing.

Before approaching a lender, it pays to make sure you're putting your best foot forward. This checklist serves as a handy guide for getting your business prepped for a loan.

Check Your Personal (and Business) Credit Score

Your credit score carries a lot of weight in small business loan decisions. Lenders want to see a positive track record of paying your bills on time and managing your debt responsibly. If you're practicing good habits with your personal and business credit accounts, that sends the signal that you can be trusted to repay a loan.

FICO scores are the most commonly used scores for personal lending. These scores are based on five factors:

  • Payment history
  • Credit usage
  • Credit age
  • Credit inquiries
  • Credit mix

Business credit scores reflect how your business uses credit. Experian, Equifax and Dun & Bradstreet each issue business credit scores, and they're typically based on things like your business payment history, credit usage and the age of your business.

Comparing your personal and business scores can give you an idea of how well you fit the lender's mold for borrowing.

Figure Out How Much You Need to Borrow (and How Much Your Business Can Afford)

Knowing how much you need to borrow matters for two reasons. Borrow too little and you may not be able to meet your goals; borrow too much and you may end up costing yourself more in interest as you repay the loan.

Having a firm idea of what you need to borrow is also important for your business's bottom line. If you're considering a large loan, you need to know beforehand that your cash flow can sustain the payments. Otherwise, you could be putting your business at risk by taking on more debt than you can reasonably afford.

Putting together a cash flow statement can let you see at a glance how much cash moves in and out of the business each month. Take your beginning cash balance, add your cash inflows, then subtract your cash outflows to get the ending cash balance. From there, you can perform a cash flow analysis to get a better idea of how much debt service your business can sustain.

Get Your Information and Documents in Order

Online lenders take a lot of the hassle out of applying for a loan, but there's still certain paperwork you'll need to move forward with financing. Each lender has different requirements for what's required but generally, you should be prepared to offer up the following.

1. Balance sheet

Your balance sheet is a snapshot of your business’s financial health at a specific point in time. The formula for creating a balance sheet looks like this:

Liabilities + Equity  = Assets

Essentially, your balance sheet tells lenders what you own (assets), what you owe (liabilities), and how much the business is worth (equity). Your balance sheet should show that you have enough assets to cover your regular operating expenses and meet your loan obligations.

2. Income statement

Also called a profit and loss statement, your income statement shows how much a business has earned and spent over a period of time. The balance sheet tells you what your business’s assets and liabilities are, while the income statement tells you how your business used them.

The formula for creating an income statement looks like this:

Revenue – Expenses = Net profit/loss

If there’s a surplus after you complete the calculation, this is your net profit. Lenders use it to see how much income your business is bringing in. Depending on the lender and how much you want to borrow, you may need to have up to two years of income statements on hand when you apply.

3. Cash flow statement

The cash flow statement is an important supplement to the income statement, because it accounts for the actual collection of revenue and payment of expenses. Cash flow statements can help you determine how much you can afford to borrow and they also play a role in the financing process. A lender can review your cash flow statements to gauge how well you manage your cash and whether the business is equipped to repay the loan.

4. Personal and business tax records

Lenders are also likely to want to take a peek at your personal and business tax records, particularly if you have a newer business. These records paint a picture of how adept you are at managing your personal and business finances, as well as how much revenue the business is generating.

If you have a tax identification number for the business, you'll need to provide as well. Your Employer Identification Number (EIN) is a nine-digit number assigned by the IRS that you can use to identify your business in place of your Social Security number. This tells the lender how long you've been in business, which is something else that factors into loan approvals.

Other documents

Aside from these documents, you may need copies of your personal and business bank statements when you apply for a loan. These statements allow lenders to see how you manage your money on both fronts, and what you have in cash reserves to cover loan payments and day to day expenses.

If you're applying for a secured loan, you'll also need to have documentation for your collateral. For example, if you're borrowing against the value of a piece of land you own, you'd need proof of ownership and a professional appraisal showing how much it's worth.

A small business loan can be a big help if you'd like to expand your business and the more you know about what to expect, the better. Following this checklist can help you dot your i's and cross your t's so getting debt financing is as stress-free as possible.

Bond Street is a company transforming small business lending through technology, data and design. Bond Street offers term loans of up to $1,000,000 with interest rates starting at 6%.