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The Small Business Loan Checklist: Here’s Everything Your Lender Is Looking For!

How do you get hands on a small business loan without hassling from lender to lender?
Your ability to pay back is key! Banks are more interested in your capacity to settle a loan than anything else.

Here’s what they go through:

  • Bank statements
  • Business assets
  • Debt utilization
  • Practicality of your business plan
  • Financial statements
  • Business and Personal Credit Scores

Your loan requests are not bearing fruits because the lender is not able to easily determine your creditworthiness. Make sure all the information you provide is accurate.

Double-check from the most seemingly basic info like your name, phone number, tax forms, bank statements, location and address, to more complex info like whether you’re a sole proprietor or a partnership.

Take time to update any changes on any of the above info.

Bank Statements

Lenders are looking for consistency when scrutinizing your bank statements to see if you are worth lending money. If your statement shows regular deposits of substantial amounts; the better!

That’s why you should avoid drops in your graph because lenders love to see a steady upward trend in revenue over time. To be specific, Banks want an average per day balance of not less than $10k+ over a 90-day window.

Be careful managing your bank accounts to keep this average per-day balance at a moderate or as high as you can. Keep off overdrawing your business account and depending on overdraft protection.

Business Assets

Lenders are more comfortable when you have assets they can seize to repay your loan if things go south. Assets may include accounts receivables and per-day balances in your business checking account.

If you’re business has insufficient assets, then the bank turns to the owner for Personal guarantees. Retailers should avoid providing personal guarantees where possible because it puts one’s personal assets and the business at risk.

Financial Statements

Review your financial statements for accuracy and comprehensiveness. Moneylenders use balance sheets, cash flow statements, and income & loss statements to check for:
Earnings before interest, taxes, depreciation and amortization (EBITDA)

  • Debt-to-equity ratio
  • Accounts payable
  • Gross margin
  • Cash flow
  • Accounts receivable

If possible, have your Financial statements audited by a certified public accountant (CPA) before you surrender them for review. Ask the lender what statements they need.

Debt Service Coverage Ratio (DSCR)

Your debt service coverage ratio typically shows how you are using your debt caps. Banks want something less than 1.25-1.35 times your spending (the loan you’re seeking included).
Every lender has a unique way of working out DSCR. Most of them work annual net operating income over total principal plus interest of all your current debts. Your lender may also check for tax obligations, income fluctuation by season and anything else they deem meaningful.
Anything less than 1.0 points to a negative cash flow and inability to settle a new debt.

Business Plan

Your business plan should clearly state how you’re looking to spend the loan and include practical financial objectives for future expansion. Add in market info, explain your business status, and be clear about how much demand there is for your products and services.
Lenders want you to explain how your business plans to adapt to market changes and how it will rake in more profits to pay back the loan.

Personal and Business Credit Scores

Most lenders will view both to see how well you can manage your finances. Go through your credit reports and follow up with bureaus to remove any inaccuracies.
More ways to boost up credit scores include;

  • Scheduling payments to settle them on time
  • Minimizing your debt
  • Using debts sparingly
  • Looking for a business credit card

For more established firms with a strong financial standing, personal credit scores are less important.

Wrapping Up

Now you know everything it takes to qualify for a small business loan. Prepare all docs before you approach a lender so that everything runs smooth from application to acceptance.