59% of small businesses report not having enough capital to grow or sustain their business, according to the Federal Reserve Banks’ Small Business Credit Survey. Moreover, the knowledge gap about small business loans and financing has made it even harder to set your business up for success. While some sources may give new borrowers the impression that applying for loans can be quick and easy, it’s important to know that you should take your time with this decision.

Here are four things you can expect when applying for business loans.

1. Consult a team of experts.

• It’s never a bad idea to consult with several experts including, lawyers, financial advisors, tax advisors and lending experts before making a big financial decision like applying for a business loan. These professionals can provide helpful insight into financial projections, upfront costs, budgeting, potential risks, and how to mitigate those risks.
  • Business tax advisors, for example, can provide essential guidance about legal structures, such as S Corporation or Limited Liability Company (LLC), and identify which type is right for your company.
  • A lending expert can provide insight into how much you can qualify for, which loan products might help you reach your goals, provide cost breakdowns, and shed light on how to increase your approval odds (or what you need to in order to qualify for a loan).

2. Evaluate loan types.  

To apply for a loan that helps your business, it’s important to know what you want and don’t want. Consider how much lenders are willing to let you borrow, and how this matches your financial needs and budget. Often, borrowers will take out a loan that’s less than what they got approved for because it makes the most sense for their budget. A few things to know when evaluating loan types:

• It’s wise to only take out loans you can comfortably pay back. Only take out loans from an accredited lender or financial institution back by the Federal Deposit Insurance Corporation (FDIC). Visit fdic.gov to search for FDIC-insured banks and lenders near you.
• The Better Business Bureau ratings and the CFPB’s Consumer Complaint Database allow you to see the experience other customers have had with a lender. It’s okay to shop around. Compare multiple lenders to see which one meets your needs. This will allow you to choose the most favorable option for you and your business.
• Lastly, make sure you‘re comfortable with the interest rate before committing to a contract.

There are different types of business loans* depending on what you are trying to finance. While this list doesn’t encompass all types, here are a few common business loans.

• Business Lines of Credit: are revolving loans used to fund short-term or seasonal needs including, bulk inventory ordering, bridging accounts receivable gaps, and more. These loans allow you to draw and repay funds repeatedly to help manage cash flow or any unexpected expenses.
• Owner-Occupied Real Estate (OOCRE) Loans: are designed to finance or refinance the purchase of property used solely for the loan holder’s business. Typically, a company must use the majority of a property of its own operations to be eligible for an OOCRE loan.
• Equipment Loans: are used to purchase equipment or machinery needed to elevate your business and offer additional services. This loan prevents you from having to pay the entire cost of the equipment upfront, which can be costly.
• Acquisition or Expansion Loans: are helpful when your business is ready to expand or you’re looking to purchase and existing business. Whether you’re purchasing more inventory, opening a new location, launching a new product, or hiring additional staff, this loan may be beneficial.
• Small Business Administration (SBA) Loans: are funded by the U.S. government and are relatively low risk because the government promises to repay 85% of the loan back if the borrower defaults. 

3. Assess your credit score. 

Lenders typically require a credit check to begin the loan process. Business owners with a lower credit score may have to provide lenders with extra documentation to show strong finances and revenue.

• Business owners can also consider bringing a co-signer or business partner with stronger credit when applying for a loan. If you are applying for a term loan or an SBA loan, you may also be asked to provide your business credit score in addition to your personal credit score. 

Sometimes, it takes some personal credit score repair to get in the right space for a business loan. For credit building resources, visit efirstbank.com/education or the Financial Health page at efirstbankblog.com.

4. Prepare your documents.

Usually, you will have to prepare several documents when applying for a small business loan. Lenders often request tax returns going back at least two years, and financial records like business bank statements, income and cash flow statements, accounts receivable, most recent and projected balance sheets, and outstanding debts. They may even ask to see your business plans, cash flow forecast, and proof of collateral.

Here are some commonly asked for documents:

• Balance Sheet: A balance sheet is a statement of a business’s assets, liabilities, and owner’s equity as of any given date.
• Income Tax Returns: All businesses are required to pay and submit documentation of an income tax return.
• Business Plans: A business plan describes a company’s strategy and demonstrates how a business owner plans to use loan funds, investments and capital. Lenders want to see what plans your business has to generate revenue.
• Financial statements: Lenders will analyze bank statements and other financial statements, including income and cash flow statements, to assess your loan repayment ability.

For more business-related resources, visit the Business Success page at efirstbankblog.com.

*Subject to Approval

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