Getting your small business ready to apply for a loan requires a great amount of preparation. Here is some helpful information about fully preparing your business for the loan application process.
Most small businesses will, at some point, require some level of funding to keep the doors open, and the chances are good that you have already explored your options. Your need for capital ebbs and flows over time along with your business’s goals, customers, and number of employees. Potential lenders will obviously look at the large picture of your business, but there are some finer points of your business to make sure you are ready to apply for a lending option.
First, potential lenders or investors are going to look at the gross margin percentage of your business, or the percentage difference between what a product/service sells for and what it costs to produce. However, there must be a balance between an acceptable margin and still selling a quality product or service. Small business success relies greatly on appealing to your customer base, and selling a quality product keeps your customers happy and strengthens your brand. Potential lenders or investors want to see that your business is doing something special to set it apart from competitors in the market.
Your small business is likely to have a least a few employees, and effective leadership gives lenders more confidence in their capital. When applying for a lending option, there are three steps you should take to prepare your business to apply: 1) check your credit; 2) determine your financial need; 3) gather the necessary documentation. Lenders are also going to carefully examine your business regarding:
- Your current equity investments: Business loan applicants must have a decent amount of capital already invested in their business.
- Cash flow: How does your small business manage cash? Cash outflow should not exceed cash inflow.
- Working capital: Positive working capital is essential to the success of your business to meet its operational needs. Working capital is defined as the difference between current assets and current liabilities.
- Collateral: This second form of security can show your lender that you have a second source of loan repayment.
- Resource management: Lenders are concerned with how you handle your day-to-day business, including loan repayments, the collection of debts owed to you, and delivery of your service or product to your customer.
Understanding your small business’s financial needs requires comprehensive research into your business’s daily practices, productivity management, and urgency of capital need. Having an influx of capital to your business sounds wholly beneficial, but you should have a set plan for how you will allocate the money.
Additionally, before applying for funding, you must acquire all of the necessary documentation for the lender. The United States Small Business Administration offers a comprehensive list of necessary documents: personal background, resumes, business plan, personal credit report, business credit report, income tax returns, financial statements, bank statements, collateral, and legal documents.
You should also consider asking your lender—whether you’re going through traditional channels or alternative channels—for advice on how to prepare for the application process. Capital providers want to see your business succeed, so working with your lender as a partner can provide excellent insight into your small business and its success.