When you need to borrow money for your business, where do you start? One of the keys to a successful search and completion of a business loan is preparation. Here are 5 things you must do to ensure success:
- Specifically define your objective. Do you need money for new equipment to increase capacity and accommodate growth? Is your business seasonal, requiring some borrowing during off-peak times? Do you need to refinance with a different lender because you’re not satisfied with your current lender? Knowing exactly why you need the money and what it will be used for helps lenders understand your business better and helps them provide the most appropriate financing structure.
- Know your credit profile. Lenders hate surprises during underwriting. Letting them know up front what both your business and personal credit look like goes a long way towards building trust and helping to a fruitful conclusion. If you’ve had credit issues, have not established much or any credit, or have a stellar credit rating, let the lender know, along with how you know.
- Have explanations ready for derogatory items or anomalies. Did you have an unexpected drop in revenue? Was net profit affected by a significant expense increase? Did you temporarily fall behind on payments for an existing? Being able to provide a complete and reasonable explanation of the occurrence(s) also builds trust with the lender, as well as alerting them to hurdles that will need overcoming. (under the no surprises category again)
- Have all financial documents complete and up-to-date. This includes P&L, Balance Sheet, Cash Flow, and a Personal Financial Statement. This is about first impression as much as anything else; if you apply for a loan and immediately provide all of the financial documents a lender needs to underwrite, you are viewed as an organized, competent, and reliable borrower. The lender may get enough insight from these reports to suggest an alternative you had not thought of earlier. It also saves both you and the lender time – compressing the time line for loan approval.
- Learn about borrowing options available. Do some research. Get a basic knowledge of the different types of business loans and their specific structures. Knowing your options can help you determine which financing vehicle is right for you, inform you which of your assets are encumbered, and allow you to think about long term implications for your business.
In short, nothing is more valuable in applying for a loan than preparation. It will save you time, money, and most of all – frustration.