A time may arise when your business needs an injection of capital to expand, purchase critical equipment or make it through a difficult period. In that moment, getting a business loan may be the right financing option. To make it a real option, it’s important to know well in advance what that takes. By arming yourself now with knowledge, you can have all the proper documentation and plans in place. That way, you’ll be set up for success if you ever need a business loan.
Key financial documents and critical decisions
When deciding whether to lend a business money, the key thing that a bank or credit union looks for is that the business has the capacity to pay back the loan. Here’s what a bank will expect you to show on paper and what you should be thinking about in advance:
1) Income sources
A banker wants to see that you have enough income coming in to not only cover your loan but also pay for other business obligations like rent and payroll. Common documents bankers request include tax returns and income statements. If you think you may need financing this year or in the foreseeable future, it’s important to bring together your accountant and business banker. Your business may be writing off a lot of expenses in order to reduce taxable income on your tax return. Showing low income on a tax return, however, could put your business at a disadvantage when it comes to getting approved for a loan. By working as a team, your accountant and banker can help you come up with the best plan for your return when you’re exploring financing.
If you’re an early-stage business with little income, know that income sources are only part of the picture. The pieces below are other key elements a bank factors in when deciding whether to lend money.
2) Guarantors
New businesses or those in the formation stage should expect a bank to ask for guarantors. A guarantor is someone who guarantees to pay your debt if you can’t repay the loan. That person would co-sign the loan with you. Avoid making this a last-minute stressful conversation with a spouse, relative, friend or investor. Think about who this could be, and ask your banker what documentation that person would need to provide. By thinking about this early, you’ll give yourself enough of a runway to have that important conversation with the right person and know what to ask for if the time comes.
3) Collateral
Banks are often going to ask for collateral when you take out a business loan. Collateral is an asset that the bank takes ownership of as security (and can sell) in case you default on your loan. Examples of collateral include titles to cars, accounts receivable, or a lien on your home or other real estate. Sometimes, in return for collateral being part of your loan terms, the bank will provide you with a more favorable loan interest rate. If you’re thinking you may need financing in the future, start learning from your banker what might be accepted as collateral.
A business banker is on your team
While applying for a loan involves a lot of heavy conversations, considerations and detailed documentation, remember that Elevations business bankers are part of your team and want your business to succeed as much as you do. Your banker will only move forward with a loan if they are confident in your ability to repay it and believe that it’s in the best financial interest of your business. Once you receive financing, they’ll have regular check-ins with you to see how the business is progressing. As your business matures and you show a history of making on-time payments, your lender may even be able to remove some of the conditions of your loan.
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