Five Steps to Help Secure a Business Loan
Follow these tips to help increase your chances of receiving the financing you want.
If you think your business may need to borrow funds at some point, it's prudent to begin the process well before you run into a cash crunch. Go to your bank and ask the commercial loan officer to open a file on your business. What is in your file – and the fact that you have already put it together – could mean the difference between getting a loan when you need one and being turned down.
Here's what you need to do to prepare.
1. Organize your financial documents
Any lending institution will want a financial snapshot of your business in order to make a decision about giving you a loan. To that end, gather:
- Three to six months of bank statements
- Two to three years of financial statements, including interim balance sheets and income statements
- Two years of tax returns
- Accounts receivable, accounts payable and aging statements
The latter isn't necessarily a requirement, says Sharon Gray, Regional Vice President for Business Banking at Union Bank, but it helps complete the financial picture. "We don't always ask for them," she says, "but if they're available, the process goes faster."
It's also a good idea to review your company's credit report from a credit reporting agency, such as Dun & Bradstreet® or Experian™. Areas to concentrate on include: company data, such as your contact information, credit risk rating, payment history, collections, legal concerns and UCC filings.
At the same time, make sure your income is verifiable. Gray frequently encounters cash-based businesses that may not have properly accounted for this income. Even if cash flow is good, the money has to be represented properly on tax returns for best results, she says.
2. State your business plan
Lenders want to understand your business model, goals and the strategies. A business plan should include details about your company, including: description, target market, competitors, competitive advantages (key employees or intellectual property), growth strategies (acquisitions or opening of other facilities) and time frame to accomplish these goals.
Include a work-in-progress report about current contracts, especially if your business relies on government contracts or works in professional services, such as doctors, lawyers or accountants. This gives a better understanding of future income. "If a lot of the contract monies have already been paid, but the business is looking for a line of credit, that raises red flags," Gray says.
3. Work on your credit rating
Your company's credit rating influences many areas of your business, from payment terms to interest rates on loans. You can help improve your rating by:
- Making timely payments. Paying bills by their due dates or earlier shows creditors and suppliers that you are a responsible financial manager. It also can increase your credit score with the credit agencies.
- Keeping multiple business accounts in good standing. This shows that you are financially responsible. This is different from your personal credit rating, where multiple accounts may reduce your score.
- Reporting data. Some of the information in your business profile with the credit agencies is self-reported, so fill in as much as you can. Request changes if you notice any errors in what the agencies wrote. Ask suppliers to report your payment performance to the agencies.
4. Organize your personal records
Lenders may review your personal records to predict how you fulfill business obligations, so keep your personal bank statements and tax returns in order. "Because of the Patriot Act, any time that you borrow money, whether for yourself or your company, the bank will pull a credit report on you. It's the law now," says Jimmy Lewin, managing partner of BizPlanIt, an international consulting firm with several clients in California.
5. Know your purpose
Since we may be coming out of the recession, you might want to expand your business. When you provide lenders with a clear sense of how the money will be used, they can help determine the best financial instrument. "You may ask for a line of credit, but that's not the best option for buying equipment," Gray explains. "In that case, a loan or lease arrangement may be better. We can help you with that determination."
For more information on Union Bank's business loan options, call 888-818-6060 or stop by a Union Bank branch and talk to a banking officer. Or, apply online at www.unionbank.com/applynow for loans of $50,000 or less.
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