Applying for and Closing Your Small Business Loan
The small business loan world is a lot more complex than it used to be. It’s no longer just bank loans and lines of credit. There is an entire new universe of online lenders offering a plethora of products. It’s important you are familiar with these options before you get started.
What Financials Will Lenders Ask for During the Small Business Loan Application?
Small business loans can have pretty extensive applications – depending on the loan product you are applying for. Generally speaking, the lower the cost of the loan and the longer the term of the loan, the more paperwork that will be involved. But, no one lender is alike and each will have their own set of requirements. Here’s an idea of some of the most popular documents needed for small business loan applications. Keep in mind -- this is only a portion of what many lenders will ask for!
Business Bank Statements:
Bank statements are a document you will almost always be expected to provide. For some lenders, you may just need 3 months. Others may ask for 6 or 12 months. Some will even ask for 2 years. Be prepared to pull whatever history length the lender asks for.
Many lenders will want to see your balance sheets or “statements of financial position.” They will most likely want to see a balance sheet that has been updated within 60 days. This is to give the lender a “snapshot” of the company’s recent financial health.
Profit and Loss Statements:
Many lenders will want to see your Profit and Loss Statements, also known as your Income Statements. They will most likely want to see your P&Ls from the last two fiscal years (also shown on business tax returns), as well as a company prepared Year-to-Date (YTD) version that has been updated within 60 days. This is primarily to determine the cash flow of the business and if it is able to meet existing and proposed debt obligations.
Business Debt Schedule:
Some lenders are going to want to know if you currently have business debt and if you do, the payment details of that debt. To do this, they will ask for a debt schedule. This helps the lender determine your current debt obligations and if your cash flow is able to meet existing and proposed debt obligations.
Business Tax Credits:
Most lenders will want to see your business tax returns from the last two fiscal years. If you haven’t filed your taxes for this year, it might be best to do so before you apply. Lenders will use your business tax return to verify revenue, among other things. If you are a sole proprietor or LLC who doesn’t file a separate business tax return then don’t fret! Lenders will just want to see the forms and paperwork tied to your business, like a Schedule C, on your personal tax returns.
Calculating the True Cost of Small Business Loans
When you are shopping small business loans, it can be very difficult to compare the various products on an apples-to-apples basis. Why? Many lenders advertise the cost in “interest rates” but, truth be told, this doesn’t offer a full representation of the price of the product. So, how can you compare products?
ASK LENDERS FOR THE APR.
APR stands for Annual Percentage Rate. It is probably a term you are familiar with if you use a credit card. It represents the cost of a loan by including the interest rate AND any other fees you will incur to take on the loan. You may think you’re getting a killer interest rate from a lender, but if they have a ton of hidden fees, they may not be the most affordable option. That’s why APR is so important – it lets you compare loans across the board. APR can sometimes be difficult to calculate, so it is best to use an APR calculator.
Know What Fees to Watch For
Now that you know fees affect APR, you’re probably wondering what type of small business loan fees we’re talking about. Here’s a cheat sheet of fees you need to watch for with small business loans:
An origination fee directly reflects the cost lenders incur to make a loan (think administrative work, etc.) It is often quoted as a percent of the principal.
If you’re considering an SBA loan, there is a chance you might have to pay a guarantee fee. Why? The SBA doesn’t directly make small business loans. Instead, they guarantee portions of loans, making it less risky for lenders to make loans to small business. But, to do this, lenders must pay a portion of the guaranteed amount to the government, so they often pass this fee directly on to the borrower.
Considering paying your loan off early? Better be sure the lender doesn’t have a prepayment penalty! This fee is usually calculated as a percent of the outstanding principal at the time you decide to pay it off. Many lenders do this to ensure they recoup their costs from underwriting/servicing the loan.
Since it costs money to run credit and background checks, as well invest the time to underwrite a loan, some lenders will charge you a processing/application fee to recoup that cost upfront, or wait until the loan is closed.
Late Payment Fee:
Probably not much of a surprise here, but with some lenders, if you’re late on a payment, they’ll charge you a fee. If they aren’t automatically drafting from your account, be sure you’ve got a good internal reminder system in place so you never forget a payment!
Check Processing Fee:
Many borrowers make their payments through ACH. If you prefer to send your payment in with a check, some lenders may charge you to process it. It is very important to discuss payment methods with lenders before signing on the dotted line.
Rate Shop With Multiple Small Business Lenders
Credit reporting models understand that “rate shopping” exists when people are looking for loans -- whether car, student, mortgage, or business. But, you want to make sure you do your rate shopping within in a 2-week period, so the credit reporting model can recognize that is what you’re doing.
Most credit scoring models are built so you can shop for a loan within a certain period--usually a few weeks--with little or no impact on your score.