What is the Process for Applying for a Loan?
Forms vary by program and lending institution, but they almost all ask for the same information. You should be prepared to answer the following questions:
- Why are you applying for this loan?
- How will the loan proceeds be used?
- What assets need to be purchased, and who are your suppliers?
- What other business debt do you have, and who are your creditors?
- Who are the members of your management team?
Most applications will also require a battery of financial information about you, your firm and your plans. Here are the most common elements:
Either as part of the loan application or as a separate document, you will likely need to provide some personal background information, including: previous addresses, names used, criminal record, educational background, etc.
Some lenders require evidence of management or business experience, particularly for loans that can be used to start a new business.
All loan programs require a sound business plan to be submitted with the loan application. The business plan should include a complete set of projected financial statements, including profit and loss, cash flow, and balance sheet.
Personal Credit Report
Your lender will obtain your personal credit report as part of the application process. However, you should obtain a credit report from all three major consumer credit rating agencies before submitting a loan application to the lender. Inaccuracies and blemishes on your credit report can hurt your chances of getting a loan approved. It’s critical you try to clear these up before beginning the application process.
Business Credit Report
If you are already in business, you should be prepared to submit a credit report for your business. As with the personal credit report, it is important to review your business’ credit report before beginning the application process.
Income Tax Returns
Most loan programs require applicants to submit personal and business income tax returns for the previous 3 years.
Many loan programs require owners with more than a 20% stake in their business to submit signed personal financial statements. You may also be required to provide projected financial statements either as part of, or separate from your business plan. It is a good idea to have these prepared and ready in case a program for which you are applying requires these documents to be submitted individually. Many loan programs require one year of personal and business bank statements to be submitted as part of a loan package.
Accounts Receivable and Accounts Payable
Most loan programs require details of a business’ most current financial position. Asset-based lenders will probably want to see this before almost any other documentation. Before you begin the loan application process, make sure you have accounts receivable and accounts payable.
Collateral requirements vary greatly. Some loan programs do not require collateral. Loans involving higher risk for default require substantial collateral. Strong business plans and financial statements can help you avoid putting up collateral. In any case, it is a good idea to prepare a collateral document that describes cost/value of personal or business property that will be used to secure a loan.
Depending on a loan’s specific requirements, your lender may require you to submit one or more legal documents. Make sure you have the following items in order, if applicable:
- Business licenses and registrations required for you to conduct business
- Articles of Incorporation
- Copies of contracts you have with any third parties
- Franchise agreements
- Commercial leases
Organizing Your Documents
Keeping good records is essential for running a successful business, and especially critical when applying for a loan. Make sure required documents are orderly and accurate. All information you provide will be verified by your lender and the organization guaranteeing the loan. False or misleading information will result in your loan being denied. Finally, make sure you keep personal copies of all loan packages.