So you’ve decided to apply for a small business loan.
It’s one of those bleak realities—you need money for expansion, for expenses during a rough patch, for refinancing. Whatever the reason, you know you’ll have to go, metaphorical cap in hand, begging at the door of a big lender.
So what’s the secret for hitting the ball out of the park in front of your suit-and-tied banker? And how can you submit that application with a confident smile, knowing you’ve got all your ducks in a row?
A lot goes into applying for a small business loan. Keep reading for an overview of the top three crucial documents that lenders assess during the application process, and how to provide them with exactly what they’re looking for.
Your loan outcome hangs in the Balance…Sheet.
One of the first things a lender will consider when offering a loan is your balance sheet. Your balance sheet provides a picture of your assets, liabilities and equity at any given point in time. This creates a holistic picture of a business’s financial health. You’re going to get deep with your lender, fast, by putting it all on the table here.
Looking at the balance sheet gives a lender insight about your business that can either boost their confidence in you—or make them step out for a phone call and never come back.
You can win them over on this financial document in a few ways:
- Demonstrate you have the net capital and liquidity to cover expenses, both expected and unforeseen.
- Present a picture of efficiency (i.e. show that you aren’t a frivolous maniac when using your assets).
- Illustrate your path of growth by comparing data from different financial quarters and reassuring them that you are, in fact, working on yourself.
Think of it this way: lenders have been burned before and want to make sure you aren’t going to break their hearts. A solid balance sheet is the first step in building that trust.
P&L or What’s the deal with Income Statements?
Once they’ve seen your balance sheet, lenders will want to dig a little deeper and move onto your income statement, also known as a profit and loss statement or P&L.
Why? Your income statement may only include revenues and expenses, but it’s a key insight into one teeny, tiny, extremely crucial factor: profitability.
Survival of the fittest isn’t just applicable to biology, and a lender wants to know that your business will make it in the wilds of the business jungle. Are your profits in the black so that you can pay them back? Are you actively refining and reducing expenses, demonstrating your superior intellect and business savvy?
A lender needs to know that they aren’t pouring funding into a business that’s leaking money faster than the Titanic, post-iceberg.
Show Me the Money: Cash Flow Statements
You have your balance sheet and income statements in order (and in the black) and your lender’s shoulders are starting to relax. It’s time to drive it home with your cash flow statement.
A cash flow statement describes how much cash is flowing in and out of a business and where and how it is being used. It solidifies all the ground that you’ve gained with your nervous lender and proves that you really are as good in real life as you appear on paper.
With information gathered from your operating, investing, and financing activities, a small business uses this financial statement to put its “money where its mouth is.”
Your cash flow statement will also determine how large of a loan payment you can afford. Typically, a lender will want your total monthly income to be 1.25 times your total monthly expenses. Lenders like to know that you have a little wiggle room at the end of each month for payments.
Other Important Documentation
While the three types of financial statements above are extremely important in securing a loan, lenders also consider other components of your application:
- Your business plan/statement (the more detailed, the better)
- You personal credit score (especially if you are just starting out)
- Your personal and business bank statements
- Proof of collateral
- Any legal paperwork that may affect your business (such business licenses and registrations)
- Your vaccine status (just kidding...or are we?)
When it comes to wooing the discerning lender, you can’t leave it up to serendipity. Provide correct, complete documentation for your balance sheet, income statement, and cash flow statement. Present as strong an application as possible. Sit up straight and make eye contact like your mother taught you, and you’ll be well on your way to snagging that small business loan.
Looking for help with a small business loan or other financial tangle? Contact KYN Accounting today, for friendly, straight-shooting accounting advice.
Have you been successful in applying for a small business loan before? Share your tips below!