Your business is quickly growing, and you need to fill in the gap between your pay cycles. You’re pumping out orders faster than you’re collecting the money owed to you. Or, maybe you’ve decided you want to spruce up your business with a fresh coat of paint, and invest in some advertising to generate more sales, or maybe hire another employee. Whichever the reason- you’re starting think; I may need a loan! Then the panic sets in. Who do I talk to? What am I going to need to bring to the bank? Do I even qualify?
Here are the top 3 things you need to know when applying for a Business loan at the bank:
- Be Ready! When the idea starts swirling in your mind that you may need a loan; that’s the time you need to prepare. Although document requirements vary, at a minimum you will need to bring with you; 2 years personal and 2 years business tax returns, YTD Balance sheet, Profit & Loss and Accounts Receivables. It important to note that you should always work closely with both your accountant and banker so they understand the goals for your business, and its growth. A small business is taxed at high rates, so they tend to write off excessive amounts from their tax returns, these are great for tax savings purposes- but not so good when you are trying to apply for a loan. Deductions such as depreciation are line items bankers/lenders love, because we can add them back to your income, which could help you qualify! For the sake of stating the obvious- You need to be making money in order to qualify. However, if your business has not been operating for at least two years, you may need to leverage your personal property as collateral or visit other options such as crowd funding or private investors.
- Product! Do you need a loan or a line of credit, the answer between these two products could be the difference between and approval or a decline. Since 2008 banks have been very apprehensive with giving Lines of Credit to business owners, especially if you have no collateral to back it up. Although most business owners always want a Line of Credit, most don’t know how to use it and end up not having them renewed by the bank the following year. Lines of Credit are annually renewable, they have variable interest rates, have an annual cost associated with them, and usually require that you “revolve the line” within 12 months. That means you have to pay the entire balance off and keep it a zero balance for 30 days. This is where business owners shoot themselves in the foot. However, a “term Loan” is most times the safer way to go. A term loan is usually amortized for a period of 5 years, interest rates are fixed, and you get all the money upfront. There are no annual costs, and you won’t have to provide the bank with financials every 12/24 months. Banks favor term loans because they collect their fees upfront, and they pose less risk to them. Term loans are also great for buying business equipment. Consider both these options carefully, and discuss with your banker which is best for you and your business.
- Credit! Credit history is one of the first things that lenders will review when going over a business loan application. A good credit score proves that the business owner has properly managed both their personal and business finances by making all of their payments on time. Banks review both your personal and your business credit reports. Did you know that your business has a credit score? Well, it sure does. If you buy items on credit from vendors, they are likely to report to major credit reporting agencies. Companies such as Staples, Office Depot & even the USPS (Pitney Bowes) report to the credit agencies. Its import to monitor your business credit report for accuracy as much as you monitor your personal. You would be very upset to get turned down for much needed loan, because your administrative assistant forgot to pay and invoice for office supplies. I’ve seen it happen.Visit Equifax/business to receive a copy of your business credit report.
If you have been to the bank and despite these 3 things you were still declined, there could be other things at play. Loan approvals are harder in 2017 then they were 10 years ago, and there are a lot of numbers and information that goes into the underwriting process. Even your business industry has a weight in. Work with your lender or banker to understand what went wrong, maybe you just missed your approval by one thing, and that could be something you could fix relatively quick.
In fact, a good rule of thumb is at the beginning of the year ,you should sit down to review your financials with your Business advisors to discuss any projects on the horizon, and what you will need to get them accomplished. This way you can look back at your previous year’s tax returns and make income, or salary adjustments in your favor. It’s an interesting process but I can assure you this will work in helping you achieve your Business growth goals.