6 Documents to Prepare When Applying for a Business Loan
In this post, we’ll discuss some of the documents that are frequently requested in the loan application process. Typically, the more information you can provide for lenders, the easier it’ll be for your application to be quickly approved.
Prepare These Six Documents Before Submitting a Loan Application:
1. Credit Report
To gain access to additional capital, your business should ideally be able to demonstrate a history of paying back loans in full and on-time. Although having a poor credit history won’t necessarily make it impossible to get approved for a loan, it’ll likely prompt lenders to give you higher interest rates.
The differences between your personal and your business credit histories will depend on the specific structure of your business. Usually, it’s recommended that you try to create a separate legal entity for your business (LLC, Partnership, Corporation, etc.). This way, things such as late payments on old student loans won’t affect your lendability. Having a credit report available when applying for a loan can enable you to determine if you’ll qualify and can be beneficial if you have an exemplary score that will make you an ideal loan recipient.
2. Bank Statements
Usually, lenders will want to review your business’ recent bank statements. Not only can they prove the legitimacy of your business, but they can also help you defend your future cash flow expectations. Lenders are much more likely to lend to businesses that they believe are actively earning revenue while managing their expenses in a healthy way, so it’s important that your bank statements reflect this.
3. Tax Returns
Your business’ tax returns can illustrate how your business has performed in the past. If your business is brand new, you should ask your accountant to help you create a projection of what your tax returns might look like in the upcoming year.
When filing your taxes, it’s important to balance maximizing deductions while maintaining the image of consistent revenue. Although writing off a significant portion of your taxes can allow you minimize your annual expenses, having too many tax deductions may create some complications with potential lenders.
4. Income Statement
Your income statement is a report of how your business has historically experienced cash flows. Generally speaking, an income statement will be clearly divided into columns of revenues and expenses.
Income statements are very useful for lenders who want to understand how a business has performed over the past year(s). Even if your expenses exceed your revenues — which is often the case for newer businesses — your income statement is still an important piece of financial information that a lender will want to have.
5. Balance Sheet
There are several differences between an income statement and balance sheet. While your income statement is a historical report, your balance sheet is a snap shot of your current financial situation. A balance sheet will represent your business’ currents assets, liabilities, and sources of equity. Each of these figures will be very important to lenders.
Essentially, the purpose of a balance sheet is to illustrate what your business currently owns and how much you currently owe. If your liabilities substantially exceed your current assets, you may have a more difficult time securing a business loan with a low interest rate.
6. Budget and Future Cash Flow Projections
When considering you for a loan, lenders will want to know how your business plans to utilize the financing, and what your future plans are. Still, because your budget and future cash flows are only projections, you will often be afforded some freedom with your claims.
To secure a loan, you should create two future scenarios. The first scenario will illustrate how you believe your business will perform without additional funding, and the second scenario should reveal how your business will be able to produce better outcomes once you receive a loan. Hopefully, this will convince lenders that you’re a viable candidate that could successfully utilize and repay a loan.
Overall, the more you can do to assure lenders that providing your business with a loan will be mutually beneficial, the more likely you’ll be able to secure a loan with a low interest rate. Although there are numerous variables considered during the loan underwriting process, having the documents mentioned in this post available will certainly be in your best interest.
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