Whether your business is in its earliest stage of development or it has been profitable for years, acquiring capital can be a daunting task: do you actually need financing? Should you choose debt financing or equity financing? If after assessing your monetary needs you decide that a business loan is the most appropriate funding option, it is vital to not underestimate the application process. Whether you're considering a term loan or equipment loan, here's what you need to know when applying.
1. Establish Business Accounts Now & Analyze Your Credit
Separate your personal and business finances by establishing business accounts early on. Why is this so important?
The state of your credit will be a significant factor in whether or not you are approved for your loan. It's a common plight of new business owners to conflate their personal and business finances. This may seem harmless, but by not separating your accounts, you aren't building business credit (which is imperative to securing a loan).
Your business credit score sometimes depends on which rater you use, but generally, reporting agencies look at:
- Payment history. This is going to be a substantial component of your score, so pay your debts in full and on time.
- Legal filings, public record, and collection agency data. These can also affect your three-digit score, depending on the rater.
For your personal credit score, the criteria is slightly different:
- Your payment history is still the most important factor in your credit score quality. Make sure to pay your bills on time.
- Your total debt also matters. This means that making minimum payments on time is not enough to keep your score up. You also have to keep your outstanding balances low.
- Your credit history plays a role. This includes the types of credit you have, the credit you have applied for, and the length of your credit history.
- Your credit utilization will be calculated into your score, too. This is amount of available credit that you currently have and are currently using. Utilization = (credit balance/total credit limit) x 100. You should try to keep this number below 10 percent.
If your reported credit scores aren't where you want them to be before you apply, you can take steps to raise your score:
- Check for errors in the report because they are more common than you may think.
- Pay off any tax liens and past-due debts.
- Remember to ask your creditors for a goodwill adjustment when making payments that are late (these erase late payments from your account).
Of course, the higher your credit score is, the more favorably lenders will look at your loan request – that may mean lower interest rates or better terms with suppliers. Try to establish strong habits early so that you aren't only relying on last-minute fail-safes.
2. Know Your Use Case
Applying for a loan for the most money that you think you could possibly need is likely going to lead your business down a road of unpaid debt. Deciding how much money you really need might not be a job that you can do alone.
Consider working with an accountant to analyze exactly what you need in order to make your loan request specific. Your accountant can also help you…
- Analyze your income statement, balance sheet, and cash flow statements from the past few years.
- Determine what your primary costs and income sources are as well as your profitability.
Your financial statements are part of the documentation you will have to submit to your lenders (see #3), so it's important you have a strong handle on what they mean.
Once you have your prospective loan amount, budget it out and decide exactly what you would do with the funds. See what areas you could cut back on and where you can't skimp. Presenting exactly what you'll use your loan funds for at the time of your loan request shows lenders that you are responsible business owner with achievable goals.
3. Prepare Your Documentation
Though the idea of documentation and paperwork may seem like the most arduous part of any process, if you have analyzed your credit and know what you are applying for, the hard part is over.
Along with financial statements like the ones discussed in step two – your balance sheet and income statement – it's also likely you’ll have to submit…
- Your past two years of tax returns and your bank statements.
- Debt you owe and payments you make – whether it be to vendors that you work with or toward property your business owns or rents.
About the Contributor
Bond Street is transforming small business lending through technology, data, and design. The company offers term loans of up to $1,000,000 with interest rates starting at 6 percent and terms from one to three years.