Business Finances

Applying for a Business Loan - How Do You Know You're Ready?

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    • Tyler McGinnis

      Advisor, Community Banking
      Aug 23 2021

Applying for a Business Loan - How Do You Know You're Ready?

Author: Tyler McGinnis, Advisor, Commercial Banking

Financing can be vital to business growth, providing funding for critical capital improvements, expansion efforts and other aspects related to strengthening and growing a commercial enterprise. However, successfully applying for and receiving the funds you may be seeking can be dependent upon steps you take in advance, some before you even think of applying for a loan. Here are some tips to consider now to be ready when you apply for financing.

The Always Prepared Borrower

According to recent reports, the SBA provided 42,000 flagship 7(a) loans totaling $22.55 billion to commercial applicants in 2020, in addition to $28 billion in loans through the CARES Act, all meant to aid businesses during the COVID-19 pandemic. The events of 2020 underscore how important it is to be an always-ready borrower so you can apply for and receive funding whenever it is needed.

What Do Banks Consider When You Apply for a Business Loan?

When evaluating a business applicant for a loan, banks tend to look for the five C’s of credit. These include:

  • Capacity: Defined as your business’ ability to repay credit, based on expected revenue, expenses and cashflow.
  • Capital: The financial contributions and investments you’ve made toward your business.
  • Collateral: Assets owned by the company that could be used to recoup unpaid loan balances, including real estate property, manufacturing equipment or other inventory and supplies.
  • Conditions: Factors that indicate how likely your company is to succeed, such as the state of the economy and political changes, as well as industry specific factors like market demand, lack of real competitors or any other factors that make it likely for you to grow your business.
  • Characteristics: This refers to the characteristics of you as a borrower, such as educational background, business experience and personal credit history.

The above considerations can require some preparation on the part of the borrower. For one thing, banks typically lend on 80% of the loan value. That means, you’ll need to prove that you can provide 20%-25% toward your project or purchase, making a solid cash flow strategy essential. 

Have a Business Plan

Your lender is also likely to request a copy of your business plan. While this tool is vital to guiding your operation, it can take time to prepare if you haven’t done so prior to seeking funding. Additionally, since your lender is looking to understand your growth potential through your revenue projections and operational processes, it’s important that your plan be up to date.

Monitor Your Personal Credit

Your personal credit can also be a big asset when applying for a business loan, so it’s a good idea to monitor your credit report and be aware of any discrepancies. You should immediately address issues that are negatively impacting your credit score to keep your record clean for when you need to apply for a loan.

Gather Your Legal Documents

Last, most banks will require a copy of business and personal tax returns going back 3 years, as well as personal and business bank statements. Copies of legal documents, such as articles of incorporation or a franchise agreement may also be necessary. Keeping these documents easily accessible and ready for your lender can help to speed the time to funding for your business.

Selecting the Right Business Lender

Taking out a business loan is different from securing a personal loan, so it’s important to choose a lender wisely.

When it comes to business lending, you’ll find that you have many choices from online lenders to your local bank. However, not every lender will take the time to understand your business and help you to secure the best type of financing for your goals.

That’s why it’s important to find a financial institution who is willing to build a personal relationship with you, one who is invested in your business’ success.

Working with a lender who is experienced with your industry can also be helpful. Someone who understands current market trends and how they may impact your business now and in the future may have a better idea of the profitability projections for your company.

Last, it’s key to look for a long-term partner. Your lender should be invested in the success of your company and willing to work with you to see it grow.

Learn more about FNBO’s Small Business Lending Solutions.


About the Author

As a community banker, Tyler is in touch with the needs of local businesses and his community. He works with small- to mid-sized companies on deposit and lending solutions designed to meet the individual goal of each business. His favorite aspect about his job is the chance he has to help businesses become more efficient and grow.

The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.