Before lenders will grant a small business loan, they need to ensure that the loan will be repaid. Every loan is a risk but banks and brokers want to take as little risk as possible. They look for businesses that show promise and they award loans to businesspeople who have solid personal and business financials and are committed to the success of their businesses.
When deciding whether or not to issue you a loan, lenders may look at gross annual sales or revenues, checking account balances, profitability and the length of time you have been in business. If your business is relatively new, the lender may ask to see a business plan. Check out How Can You Increase Your Chances of Getting a Business Loan?
If you are just starting your business, include a business plan as part of your loan application. It should include monthly cash flow projections for the first 24 months (36 months for startups). Established businesses should show a schedule of current debts and loan balances, payment schedules, maturity and available collateral. Learn how to Clean Up Your Company's Bad Credit Profile.
A lender will review your personal credit history and FICO score, especially if your company does not have a track record of producing revenue. Among the personal credit information that may be considered are:
- personal credit card debt
- personal loans
- liquid assets
- real estate holdings
- tax returns
- personal financial statements
Lenders will consider your personal spending habits, including how you use credit cards and handle installment debt. Lenders look askance at individuals with substantial personal debt, as they are less likely to withstand a reduction in income during slow times.
Lenders pay close attention to balance sheets. Any uncertainty or discrepancy of their contents will raise a red flag. They will also expect a business summary that describes in detail: the nature of your business; how the funds from the loan will be used; and available working capital, with descriptions of how it will be allocated. It should also describe how you plan to differentiate your business from competitors.
While being prepared and organized can save time and possibly help your loan get approved, too much information may be more of a hindrance than a help. There is some information that lenders may want to see later on in the process, such as proof of insurance for collateralized items or lease documents. Have this information ready to submit if your lender requests it but don't include it as part of your initial application. Overwhelming your loan officer with too much information may actually slow down the process.