Essentials in a Small Business Loan Application
Going by the age old proverb that a journey of a thousand miles begins with a single step, your loan application is that first and most essential step to get the funds you want. In fact, such is its importance that it alone determines whether you will be able to impress the prospective lender first shot, and your biggest influencing factor for a loan sanction.
It goes without saying that most small businesses struggle to get loans, at least initially because of poor or nil credibility, limited or no business experience and a general fear among prospective lenders that smaller businesses tend to fail more and they have to write off such loans as bad debts eventually.
This makes it all the more necessary to prepare your loan application with the utmost care and expertise so that it doesn’t get rejected. The following six steps will help you maximize the potential of a small business loan application, and to secure that much needed financing your business requires to survive and flourish.
Filling out the Application Form
Every loan comes with a separate agreement depending on the loan amount, nature and terms of repayment. These are often written in typical legal language and are incomprehensible to most prospective borrowers.
That’s why reading the agreement very carefully is compulsory before you ink it. If need be, take the help of a lawyer or financial expert who is familiar with such legalese and who can explain to you in simpler language so that you don’t end up in a fix in future. Particular attention must also be paid all terms that relate to the APR or Annual Percentage Rate charged on the loan. You also need to very clearly understand terms and conditions on penalties for late payment as also those terms that regulate prepayment penalties and acceleration of due dates for payments.
If there are sections on recent credit denials, criminal convictions, late payments or bankruptcy filings on other loans, answer them frankly and honestly. Lying may work out in the short terms, but should you be found out later, the consequences are most likely to be extremely unfavorable.
Take extra care to fill out the sections on name, residential and/or business addresses, phone and other contact numbers, period of business operations, social security number and email address. Details of the business’s history including year of incorporation and type – sole proprietorship, partnership, corporation or LLC also needs to be spelt out clearly.
All loan applications usually request for personal financial information on real estate that you own, your net worth and also for business references in any community where you’ve functioned before. Fill these sections in very, very carefully, avoiding deletions, overwriting and whiteners which create a negative impression. Make sure that all applicants duly sign the form or else it will have no validity.
Assembling All Relevant Documents
An expert chef always gathers all the ingredients before he starts cooking. The same modus operandi works with a loan application. In other words, you start by assembling all necessary business-related disclosures and documents for the loan application which usually takes considerable energy and time. Every prospective lender will ask you for a host of supportive documents once you apply.
So keep them handy so that the application moves faster. Such documents may require notarization or may have to be submitted in original form or by way of photocopies. Check with the prospective lender what his specific requirements are and work in advance.
The following document are generally required for all loan applications: Business & Personal Tax Returns over the last two years; business, property, municipal & sales tax statements; business history and overview; income and profit & loss statement; articles of association and shareholders agreement, LLC and partnership agreements; all relevant permits, licenses and approvals; payroll records spanning last 6 months; title deeds of any real estate the business owns; last 6 months’ bank statements; accounts receivable statement; lease documents on any business premises; title deeds on personally owned real estate for use as collateral, if required; complete disclosure of any adverse tax, regulatory or government enforcement action; lien on any business property; and statement of copyrights, patents, and any other intellectual property rights held, if any.
Financial Statement: When you submit your financial statement, makes sure to include two things that prospective lenders usually want to see: Your business has been financially stable and strong in the past; and it will continue to remain stable in future, even with this additional debt burden.
Historic financials should ideally include a business profile that projects a healthy and growing cash flow, which can be safely taken out of the business for further distribution. In other words, it’s your business’s “safety margin” and the stronger it is, the more favorable it will be for you. Also show that you have controlled your costs well in the past and that would indicate that you run the business wisely, without wasting funds. Showing that your business also has an ongoing system for cost review and reduction whenever possible, works well with lenders.
In terms of financial projections, keep your estimates conservative. However, showing that you will manage to increase revenues in spite of the new debt also convinces and impresses lenders. This should be in addition to your genuine efforts to make fresh investments in capital equipment to increase your production and sustain sales and maintaining and/or enhancing your competitive position.
Importance of a Well Written Business Plan
Last but not least, is the business plan. It should begin with the business’s historic structure and contain full details of all products sold in the past along with their sales volumes; market prices; net revenues; total manpower involved, its cost and special expertise; total current debt and its cost; details of present cash flow; the competition your business currently faces in the market; competitor descriptions; product differentiation; and competitors’ cost structure estimates.
Finally, your projections need to specifically mention how the loan proceeds will be utilized, projected sales volume, and cost of goods to be sold in future.
Remember, once you convince the prospective lender of your cash flow in future, he’ll be happy to give you the loan because he’s satisfied that you will be in a position to repay your debt. It will definitely be a win-win situation for you all the way!
Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state.