Getting a Small Business Loan

Getting a small business loan is a dream come true for many people.  For those who are able to qualify, it can be a life changing experience.  A local commercial banker has provided me with a list of factors and considerations, and requirements for receiving a SBA loan.

Small Business Loan Factors

Here are the items that an individual will need to provide before they will be considered:

  • Resume: Some lenders require evidence of management or business experience, particularly for loans that are intended to be used to start a new business.
  • Business Plan: All loan programs require a sound business plan be submitted with the loan application. The business plan should include a complete set of projected financial statements, including profit and loss, a statement of cash flow, and a balance sheet.  Month-to-month projections are required for the first year, and then yearly projections are typical.  The normal length of projection is five years.
  • Personal Credit Report: Your lender will need to obtain a copy of your personal credit report as part of the application process. However, it is in your best interest to get a copy of the 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, so It’s critical to clear these up before beginning the application process.
  • Income Tax Returns: Most loan programs require applicants to submit personal and business (if applicable) income tax returns for the previous 3 years.
  • Financial Statements: Many loan programs require owners with more than a 20 percent stake in the business to submit signed personal financial statements. These people 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.
  • Bank Statements: Many loan programs require one year of personal and business bank statements to be submitted as part of a loan package.  Generally, these programs require statements from the previous two years.
  • Collateral: Collateral requirements vary greatly. Some loan programs do not require collateral while loans involving higher risk factors 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 the of personal or business property that may be used to secure a loan if necessary.

In addition to the foregoing, it’s important that your business is legally sound.  No lender will give you a small business loan unless all corporate formalities have been complied with.

Formalities Required for a Small Business Loan

  • Business licenses and registrations required for you to conduct business.  This will vary by business and industry.
  • Articles of Incorporation, or Certificates of Formation depending on your business structure.
  • Copies of contracts you have with any third parties.
  • Franchise agreements, if applicable.
  • Commercial lease paperwork.

Questions Your Small Business Lender Will Ask

Be prepared to discuss 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 will supply them?
  • What other business debt do you have, and who are your creditors?
  • Who are the members of your management team?
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