Banks are not in the habit of just handing you money when you ask nicely for it. There is a lot more to it than that, for sure. Getting a business loan is a process, and understanding the process will give you the best chance to walk away with the financing you need for the next stage of your business growth.
The Legwork and the Paperwork
If you’ve never applied for a business loan, the process can sound pretty daunting. I’m not going to lie, it’s no walk in the park. But to get your business to the next level, this hard work can be worth it. The loan process is going to require some or all of the following bits of information:
- How long you’ve been in business
- A personal credit score of anyone co-signing on the loan
- The credit score of the business
- Revenue and profit statements
- Bank statements
- Personal and business tax returns
- EIN and business licenses/permits
- Industry and entity type
- Ownership and affiliations
And then you get to the info about the loan itself:
- Purpose of the loan
- Loan amount requested
- Business plan
- Proof of collateral
- Disclosure of other debt
Yes, this is a high level of scrutiny, but then you are asking them to assume some risk on your behalf. Though ultimately, the risk is yours, because they will want their money back, plus interest, one way or another.
It’s a serious thing to apply for a loan, but it can be a really excellent source of leveraging the next big moves in your business. As long as you have your ducks in a row, and your business fundamentals are strong, getting funding this way can be a big boost. Let’s look at some of those business fundamentals that the bank will consider, and you should too before you even consider applying for that loan.
Factors Banks Look At
What are banks looking for when they gather all the paperwork they require? Maybe you have heard of the Five “C”s of credit: capacity, collateral, capital, character, and conditions. I’m going to give you a quick rundown on what all of these entail:
- Capacity – It all boils down to the question, can you repay the loan? Banks want to know you have the capacity to service the debt you are incurring.
- Collateral – Capacity is great, but things change. So the bank wants to have some sort of collateral in place if capacity is diminished to the point that you cannot repay the loan.
- Capital – If you are starting with zero dollars and hoping for the bank to give you what you need, that is not a good position. The bank wants to see that you have capital in place to manage business expenses as they stand now.
- Character – if you are running an established business, what kind of reputation does it have? With a good credit history and solid references, you will be demonstrating the kind of character the bank is looking for.
- Conditions – One factor out of your control as a business owner is the economic climate around your industry. If you are in a risky industry – for instance, the foodservice industry during a pandemic – it might be tougher to get a loan.
When we are helping people build their Uncommon Life, owning a business is often a cornerstone of building that life. We love to see something that grows out of people’s passion that turns into a business. Sometimes growth requires some strategic financing, so understanding the process of borrowing for your business is incredibly important. There are hoops to jump through, I know, but it will help you propel your business to the next level, and help you live that Uncommon Life.