Small Business Loan 101
Over the course of my banking career, I have worked with numerous small businesses and if you own a small business or are thinking about starting one, there are a few things you should know when you start preparing to request a small business loan.
First, your banker will need information about your business: including the history of the business, size of the business, a list of services or products the business offers, and your banker will need to know who the suppliers and end-receivers of the services and products are.
Secondly, your banker will need an understanding of what the business market-share is like and what threats and advantages your business has in the market. This is to help us evaluate the risk of extending credit.
Next, we need a strong understanding of what you will need the loan for, so that we can evaluate what type of debt facility is right for your small business. For example, if you need funds for general operating due to cash flow timing differences creating temporary short falls in available cash, then a revolving line of credit may meet your needs. Or you may need to purchase a piece of equipment to help grow your business or meet current demand. Financing an equipment purchase over time may be the answer.
If the business is established, the bank will need historical financial data on the operation. We typically ask for the two to three years of financials. This will include fiscal year-end balance sheets showing assets and liabilities of the business and revenue and expense statements. We will evaluate profit margins relative to industry standards and look for key profitability growth and expense management within the financials. Most importantly, we will evaluate the ability of the business to repay the requested debt within the time-frame allotted. Depending on the type of business, we may ask for accompanying documents such as an accounts receivable aging or copies of client contracts. Many small businesses will have software like QuickBooks that they or their bookkeeper may use to keep financials, enabling these reports to be pulled directly out of the software.
We will also require tax returns to verify the income and verify that federal filings are current. In some instances, small businesses may be formed as a sole proprietorship or a single member LLC and in that case, may file their business taxes within their personal tax returns. There are also times when tax returns may be sufficient documentation alone for the bank to review the business operations, and those instances will be handled on a case-by-case basis.
If you are preparing to start up a small business and do not have historical financials, you will need to prepare pro forma revenue and expense statements over a three or five year outlook. You will need to base the pro formas off of realistic estimations of year-over-year revenue growth and expenditures.
Keep in mind that the bank will need to evaluate the business owner’s personal financial condition along with the business. Be prepared to submit two to three years of your personal tax return history and a current personal financial statement, detailing your personal assets and liabilities, separate from the business. A link to our personal financial statement template can be found here. The bank will also complete a soft pull of your credit history.
Lastly, you will need to have all of your entity documentation ready including your certificate of formation with the Secretary of State and proof of your federal tax identification number. If you form an LLC, it is preferable to execute a company agreement between the members. The bank will keep a copy on file.