The big businesses you see today started small. They would not have been the big conglomerates they are if they did not get help at startup. To grow into a successful business, startups require capital injection that helps them to scale up their services or products range for better profits.
This is where a small business loan comes in. Without a huge bank balance to count on, small businesses sometimes find themselves in a cashflow crunch that threatens their daily operations.
When applying for a small business loan, you are required to supply the following documents to your prospective lender:
1. Credit Report
A good credit history is a major prerequisite to getting a business loan. Your credit report should demonstrate a track record of making payments on time and in full. While a good credit report will work to your advantage, having a less-than-impressive credit report does not mean you stand no chance of getting a small business loan. You are, however, likely to attract a higher interest rate with a poor credit rating. To increase your chances of getting a business loan, it is important to separate yourself from the business. As a legal entity, your business’s credit report does not have to affect your personal credit report and vice versa.
2. Bank Statements
The other document that a lender will definitely want to review is your bank statements. Your bank statements act as evidence of your business’s cash flow. You are most likely to get a small business loan if your bank statement indicates a constant flow of income and frugal management of expenditure. A bank statement shows the frequency of money in and money out.
3. Tax Returns
Nothing demonstrates the performance of your small business better than your tax returns report. If you have just started out, get your accountant to come up with tax returns projections for the following year. Your tax returns should reflect revenue frequency while at the same time balancing deductions. Although it is possible to minimize annual expenses by writing off a significant portion of your taxes, the existence of too many deductions could present problems with potential lenders.
4. Income Statement
An income statement is your businesses cash flow statement. It demonstrates your business’s cash flow over the years. It has two main columns: revenues and expenses. For most startups, it’s likely the expenses will outstrip revenues. Nonetheless, even in such a scenario, an income statement is important since it is an accurate record of how the business has been performing. A lender will scrutinize your income statement to see not only where money is coming from, but also on what you are spending it.
5. Balance Sheet
A balance sheet is different from an income statement in that it is a summary of your current financial situation. An income statement, on the other hand, is a historical report of revenues and expenses. A balance sheet includes the current assets, liabilities and equity sources for your small business, information most lenders find crucial in determining whether to grant a loan or not. The aim of a balance sheet is to show what your business owns and owes. The ideal situation is where you owe less than your own; your current assets should be more than your liabilities to attract a better interest rate. Where your liabilities are more than your assets, you might still get a small business loan but at a higher interest.
6. Future Cash Flow Projections and Budget
Another important piece of information that a lender may ask for is how you intend to use the funds you are seeking. They would like to see your budget and cash flow estimates. To convince a lender, present two scenarios to them: one, demonstrate how your business would fair without funding. Second, show them how additional funding will result in the improved performance of your business.