Whenever you apply for a business loan, you should be prepared to offer the lender specific details about your business’s financials. Enlisting the help of your accountant in completing the application, can ensure that you’ve included all the relevant information. Here are some questions to keep in mind.
How Much Do I Need to Borrow?
Before you begin working on the loan application, it’s important to clarify exactly how much money you need. Applying for too small a loan makes it necessary to find alternate financing to fill the gap. Borrowing too much increases the amount you’ll pay in interest over the life of the loan. If you’re unclear on what size loan is appropriate, have your accountant review your plans for using the loan proceeds. She may be able to help you determine if you’ve estimated the overall cost accurately.
Your accountant should also review your business finances, to pinpoint existing resources that could reduce the loan amount. For example, you may have unused assets that could be sold. Identifying possible areas for cost reduction is a good way to free up cash, so a larger loan is not required.
How Much Debt Can the Business Afford?
Once you’ve determined how much money you need to borrow, the next step is gauging the impact new debt will have on the business. In evaluating your ability to repay the loan, your accountant should review both your current and projected cash flow, along with the business’s income statements.
The cash flow statement offers a breakdown of the money your business has received, and the money it’s spent, over a set period of time. Cash flow statements reveal the liquidity of the business, and its ability to pay off monthly obligations.
The income statement reports the business’s total revenue and expenses, and the resultant profit or loss. Taken together, these documents will lay bare the burdens a loan would put on the business in the immediate future, and over its full term.
What Documents Will I Need to Complete the Application?
Before approaching a lender, you will need to prepare specific documents. These include:
- Tax returns – Lenders typically prefer to see tax returns for at least two years of business operations.
- Financial statements – Your accountant will have to prepare an income statement (also known as a profit and loss statement), a statement of cash flows, and a balance sheet. Again, having these statements for at least two years of business operations is wise.
- Accounts payable/receivable – Lenders will also be interested in money that is owed to the business (accounts receivable) and money currently owed to vendors (accounts payable). Ask your accountant to prepare a complete breakdown of both, prior to applying for a loan.
Keep in mind that a lender will also check your personal and business credit during the application process. If you have yet to establish a business credit profile, you can do so at no cost by registering your company with Dun & Bradstreet, or the business division of one of the three major credit reporting bureaus.
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