If your small business is in the market for funding, you’re probably comparing your options and worrying about whether you’ll qualify for the loans you want. Before you go too deep into the process, though, it’s important to have an understanding of what materials you will need before applying.
The best way to start your search for funding: doing research into what your business needs, what your loan options are, and what the loan applications require. Specify how much money your company needs and what you’d use it for. Look into what type of lending products would help you to accomplish your goals. Finally, research what these lenders require for applying. This all ties together—not only will you save energy by knowing what you need ahead of time, but lenders will also be pleased to see how prepared you are.
Lenders will be interested in your personal credit score in addition to your business credit score, if you have one. If your personal credit score is below 650, you will not qualify for most loans. Ideally, though, you want it as high as possible. Your business credit score rates the creditworthiness of your business—you might not have one yet if your company is young. Again, you want to protect this score as much as possible.
Depending on the type of loan you’re applying for and who the lender is, you’ll need to prepare a range of documentation before clicking send or sitting down with a potential lender. Much of this documentation requires more than just a few hours of preparation, so you don’t want to procrastinate with your loan applications.
On the positive side, many of these documents, like profit and loss (P&L) statements, are essential for business planning—so you’ll want to update them consistently anyway.
Here are some documents you should begin preparing as you begin applying for funding. Again, research the specifics of what you’re applying for so you won’t be surprised.
To prove your personal and business income, most lenders will want to see what you’re reporting to the Internal Revenue Service. You should prepare copies of your personal tax statements and those of your business. If you’re self-employed, these will likely be intertwined—but you still should know your company’s structure and have records, like receipts and invoices, to back up your statements.
Like your tax returns, bank statements display the hard numbers that back up all the other claims in your loan applications. You’ll want to have statements for both your personal and business accounts—these really should not be enmeshed if you want the best chances of being approved. Ideally, these accounts will show growing income and stable, predictable spending habits.
Commonly, most traditional lenders require 3 specific documents that provide a multi-dimensional illustration of your business’s past, present, and future performance. A balance sheet shows your company’s present financial situation by illustrating what it owns, what it owes, and what stakeholders have invested in it. The main components on your balance sheet include assets, liabilities, and shareholders’ equity or owners’ equity.
Along with your balance sheet, you will need a P&L statement when submitting an application. Also called an income statement, a P&L statement compares your revenue to your expenses over a specified period of time in an easy-to-digest manner. You’ll want to generate these on a regular basis (usually monthly, quarterly, and annually) to understand your company’s “bottom line.”
Your cash flow statement adds additional information to the picture of your business painted by your balance sheets and P&L statements. Cash flow statements show how much money is coming into your company versus how much is being spent, typically through wages and other expenses. The cash flow statement importantly measures whether your company is at risk of a devastating cash crunch—where you owe money you don’t have.
Lenders need to know that your business is legal, so you’ll want to gather any licenses or other permits to prove your legitimacy. This includes any business licenses you have through your city or state, as well as any articles of incorporation you have filed. If you’re renting your office space, you should bring a copy of your commercial lease. You’ll also probably need a copy of your driver’s license or other government-issued photo identification.
Create a resume that highlights your management experience and ability—banks will want to know where you’re coming from, even if you are your own boss. Focus on measurable accomplishments, like how much you increased sales in a year or how many new clients you brought in over a certain quarter.
Along with your P&L statement, balance sheet, and cash flow statements, most lenders will want to examine your company’s financial projections—how much money do you expect to earn in the future, and why? Depending on the lender, you should create business plans based on several scenarios: good, status-quo, and bad. While there is a sizable element of prediction in these documents, you can use your other records to help make educated forecasts.
Finally, determine how your business will use the money from a potential loan. How will your company expand and earn more revenue? Some lenders might require you to use the money only for certain expenses, so establish your answer ahead of time. You should create a financial projection that calculates how funding will actually help your company earn more money over time—this shows a lender how you plan to repay them.