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Applying for a Loan: Financial Documents to Give Your Lender

You are ready to start the new business of your dreams. It's a hybrid comic book/coffee shop with copies of "The Simpsons" comics and a fancy espresso machine. You need the capital to find a rental spot and pay the initial startup costs. You need to apply for a small business loan.

Applying for a small business loan can be intimidating, especially when looking at interest rates as a borrower. If small business owners meet with lenders prepared with the proper financial documents, they are in a better position for approval. It may even open the door to more financing options.

Financing Options and Types of Business Loans

A startup's most common financing option is a traditional bank loan or a business line of credit. These banks or credit unions look at your credit history and business needs. A good credit score and good credit history are vital for these institutions. The higher your creditworthiness, the lower your interest rate or downpayment.

New or existing businesses sometimes can't qualify for these loans because they need to meet eligibility requirements, like a certain credit score or annual revenue. That's when alternative financing options come into play.

Online lenders can then be an option for a small business owner. Just because the business is online does not mean you do not have to submit financial documents or have a virtual meeting.

The U.S. Small Business Administration (SBA) offers SBA loans for companies that cannot qualify for a standard loan. These small business loans are for businesses needing more working capital or having bad credit to qualify with other financial institutions. SBA 7(a) loan is the most common loan for SBA lenders.

Another option is a business credit card, but the interest rates are typically much higher than small business loans and depend on your credit score. There is an option for a merchant cash advance, but be careful. These are offers that get paid back by taking a future part of your credit card sales every business day.

If you can't meet any qualifying small business financing options as a business, your last resort would be to take out a personal loan. Make sure you have exhausted all other avenues first. You must make the monthly repayments, or you could lose personal assets like your house in default.

Gather Your Financial Documents

Here's a list of some important financial documents you should have readily available when applying for your loan, regardless of the funding options or loan amount you seek.

  • Accounts receivable: If you are in business already, bring your up-to-date accounts receivable spreadsheet for the last year. This will show the bank you have income coming in and can pay the loan you seek.
  • List of business assets: This includes your inventory, real estate, intellectual property, contracts, and anything that adds value to your small business.
  • Business credit score: Like your personal credit score, your business has a business credit score. Be prepared to submit a credit report, especially if you already run a business. To avoid surprises, consider your credit score and history before applying for a loan.
  • Business plan: A good business plan is a blueprint for your company. A business plan contains a description of your company. It includes your target market, competition, organizational structure, employees, operating procedures, and financial information.
  • Balance sheet: A balance sheet lists your company's assets, liabilities, and capital (owner's equity) as of a given date. Your company's assets, minus its liabilities, equals its capital.
  • Bank statements and financial statements.
  • Cash flow statement: The cash flow statement shows when your company expects to get the money owed by its customers and when the company expects to pay out the money it owes to others. Because it's monthly, it shows when the company will have extra cash to keep for future month's bills and when it may need to borrow to meet expenses.
  • EIN letter: This is your Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
  • Income statement: An income statement (a profit-and-loss statement) lists your company's income and expenses and shows how much your company has made (or lost) during a given period.
  • Income tax returns: Some lenders may ask you to submit your personal income tax returns for three years. Don't delay the process. Bring those documents with you when you apply for your business loan.
  • Operating budget: Your company's operating budget is a projection of its income and expenses and projected income (or loss) over a given period of time. It differs from the Income Statement because it reflects your company's actual income, expenses, and profit (or loss) over a given period.
  • List of personal assets: This depends on your legal structure and the type of loan you seek. The list would include real estate, vehicles, and other collateral.
  • Personal credit score: You must know your credit score if you are a solo entrepreneur or have a sole proprietorship. Some banks only make loan options available to a business with this information. They may also need a personal guarantee on the loan.
  • Sales forecast: A sales forecast is your estimate of future sales. Most businesses try to predict sales using three different figures: the "best-case" scenario, the "worst-case" scenario, and the "most likely case" scenario.

Consult an Attorney

Pay close attention to the repayment terms before signing for any short-term loan or long-term loan. Failing to pay on your loan installments can ruin your business and stop your comic book coffee shop dreams in its tracks.

When reviewing loan offers, understand the legal consequences of your actions. Contact an experienced business law attorney in your area to help you manage the loan application process and answer essential questions.

For more information, visit FindLaw's Starting a Business section. When you're ready to start your business, use our simple process to form your business.

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