Taking Out a Loan? 6 Tips For Success

As your business grows, at some point it may become necessary to borrow money to purchase real estate, inventory, or equipment. If you’ve never taken out a small business loan before you might have questions about how to do it. No worries at all! This article will teach you how to prepare so when you walk through your lender’s door everything goes smoothly.

What Should You Prepare Beforehand?

There are six key items you need to think about before you move forward with trying to obtain a small business loan. What are they? See below.

Item #1: Define Your Use of Funds

To start, you need to know without a doubt how you plan to use the money. Will you be using it for marketing purposes? To buy equipment? To purchase more inventory? While there are no rules that say what the money must be used for, you will need to be able to clearly state what your intentions are to the lender.

Item #2: Determine How Much Money You Need

Do your research in advance so you know how much money you’ll need for whatever you are trying to accomplish. The bank won’t appreciate it if you show up and don’t have any clear idea about how much you would like to borrow. Research pricing and get quotes for everything in advance so you have a specific number ready to give them.

Item #3: Figure Out How You Will Pay Off the Loan

The lender will want to know that you will be able to pay the monthly payments until the loan is fully repaid. How are you going to do this? Are you going to use sales from your business or income from other employment? From savings? Whatever the case, you need to be clear on this answer before you go and ask for the loan.

Item #4: Establish How Much You’ve Already Invested

The bank might be willing to lend but only if they know you have some skin in the game too. Ascertain how much you’ve already invested into your business. Sharing this information will show the lender how dedicated you are to your company.

Item #5: Review Your Credit Report & Score

You need to know in advance what your personal credit score is because the lender is going to check it. Comb through your credit report before you ask for a loan so you can make sure there isn’t anything on there that is incorrect or unfavorable. If there is anything negative, be prepared to explain it (any late or missed payments, for example, or closed accounts, multiple hard inquiries, and so on). Reviewing your credit report before the bank pulls it puts you a step ahead and will help you avoid any unexpected surprises.

Item #6: Gather Together Your Financial Documents There are a series of standard documents that your bank will need from you before they can approve giving you a loan. Compile them before approaching the bank so you’re ready with what they will need. These documents include:

• Bank statements (6 months – 2 years)
• Prior year tax returns (2 years)
• Profit and loss statements (6 months – 18 months)
• Balance sheet statements (current)
• Lease (current)

Note that if your business has been operating for more than three years, you’ll likely have to provide historical financial statements (P&L, balance sheet, cash flow), whereas if your company is newer you may have to show projections instead. For more information about financial statements, check out this article What’s the Deal with Financial Statements? What You Need to Know.

Also, just a tip: it’s never a bad idea to complete the bank’s application in advance on paper. This way you can make sure all your bases are covered and that you have all the required documents, even if the application will be submitted online.

A Final Word From Tuesday Brooks Founder of AJOY

Remember the following! You should only take out a small business loan for a revenue-generating activity (like to buy equipment, hire employees to produce more product quicker, or to run a marketing campaign). Don’t take out a loan to simply cover operating expenses because this will create debt that you won’t be able to cover if your sales don’t increase. If you do need to borrow money, a lender will be more apt to approve a loan for you if you determine in advance why you need it, how much money you need, and how you’re going to repay it. While a loan can be invaluable as you continue to grow your business, you should only go in this direction if you’re clear on these points. Best of luck and until next time!