It takes money to make money, or so the old saying goes. Many entrepreneurs start their businesses with their personal savings, running out of personal credit cards or borrowing funds from friends and family. If you want to avoid these ways of raising capital, you can opt to go to a bank instead. Lately, however, banks have exercised much tighter restrictions on lending. In this environment, then, the loan application – usually a standard form provided by your potential lender – is something you simply don’t want to rush.
The loan application process typically takes two to three months, from the time you start applying until the bank approves or rejects your loan application. When approaching a lender, it pays to be thorough when filling out your forms and provide sufficient documentation and backup. You should also plan to answer a series of questions about both your business and your personal financial situation. Here’s what you need to know.
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Filling out a loan application: before you start
Chances are you’ll fill out multiple loan applications in an attempt to get money. Initially, you will need to consider whether to target large national institutions that you might do other banking with, or smaller community organizations that might be more supportive of local entrepreneurs in this economic climate.
Either way, before you start the application process, personally make sure you have good credit. What previous debts, if any – including business and personal – do you have? Will they affect your ability to maintain a consistent payment schedule? “The way you manage your personal finances is a very good reflection of how you might be able to manage business finances,” says John E. Clarkin, professor of entrepreneurship at the College of Charleston in South Carolina. “That includes your personal credit.”
One area where many would-be entrepreneurs get it wrong: having too much personal credit. If you have multiple credit cards in your wallet, each with a high level of available credit, a bank may be concerned that you could take on more debt by using that extra credit if the business runs into difficulty.
Once you’ve made sure that your personal financial situation won’t be a barrier to borrowing money, it’s time to make a plan for how you will position yourself and your business idea. Ask yourself these questions: Why exactly do you need a loan to start or expand your business? How will you spend the money? If you intend to buy inventory or equipment, who will you buy it from? Who in your business will handle the loan if not you? Having a game plan for addressing these issues will make the process of filling out a loan application easier.
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Filling out a loan application: the basics of the form
Most loan applications start with the basics: asking for your business name and phone and fax numbers, as well as your business legal structure (LLC or S-Corporation, for example) and date of incorporation. If you are just starting a business, you should meet with an accountant to determine your method of incorporation ideally before heading to the bank.
The next questions on the loan application will ask about the “type of business” you run. To begin, you will need to know exactly how your business is covered by the North American Industry Classification System, commonly referred to as the NAICS code. (For more information, visit the Census Bureau website, http://www.census.gov.) Next, under “description of products and services”, you should include a brief explanation of what your company does. It doesn’t have to be long, but it makes sense to explain exactly how you make money: your sources of income, a sentence describing the products, the types of customers you have, and what your typical transaction or sale.
For the next section, on finances, you will enter your current bank account information, including your account number and recent deposit information. For gross annual income, indicate your business income for the year. And remember to stick to your current numbers: you should enter income earned in the past year, not your expected income in the future. The same goes for number of employees, cash balance, debt repayment, etc. You will want to check with your accountant or financial adviser before listing your tax assets and deciding on a year-end, as this can vary depending on what type of business you are.
The next question on a candidacy is often: Are you in good standing with your secretary of state? Basically, the bank wants to know if you have paid your business taxes in the last three years. If yours is a new entity, check with your Secretary of State that you are properly registered and in good standing before checking this box.
Lenders these days tend to ask small business owners for a personal guarantee or guarantee – or provide personal money if your business isn’t able to repay its loan. So when asked if you want to pledge your accounts receivable, inventory or equipment, you need to weigh your options carefully. Pledging a guarantee, like posting a personal guarantee, can improve the chances of approval. But keep in mind that it also increases your exposure. “If you want to start a business, you have to be prepared to lose money, but don’t lose your entire future, your home, and your kids’ college education by overcommitting,” says Dan Short, an accounting professor. at the Neeley School of Business at Texas Christian University.
The next section of the loan application will also remind you that the obligation you wish to assume could have serious personal financial consequences. Most apps will ask for additional personal information, including everything from company ownership breakdown (do you own 100% of the company or do you share shares with other directors?) to your number personal cell phone.
It will also ask you if you are married and if you are applying for the loan together with your spouse. If your spouse will play a vital role in the business, especially if you both work from home, this is something to consider, as you both have a stake in the success of the business. But if this is a business you’re getting into with non-family members, bringing your spouse and their financial interests into the business can lead to complications down the road. It would be wise to consider consulting your financial and legal advisors first before applying for a joint loan.
Finally, most loan applications will end with a financial questions section which can vary from state to state and institution to institution. Most often, this section includes a question or two about whether your business complies with state law, such as whether a customer will represent a significant portion of your sales.
Additionally, you may be asked to provide personal tax information, which you can attach or provide in separate documents. Information about whether you or others will provide a personal guarantee is often requested at this stage. If your business partners or investors are able and willing not only to promise seed funding, but also to provide support in case the business is unable to repay its loan, the bank will want to know how much collateral each co-signer has. intend to do. Making a personal guarantee not only shows the bank that you have financial stability, but also that they have confidence in your project.
“The personal guarantee is something almost every start-up will have to offer,” says John E. Clarkin, professor of entrepreneurship at the College of Charleston in South Carolina. “You make personal decisions, such as how much money to take out of the business, so the bank has to make sure you can’t pass all of your expenses through your business.”
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Completing a Loan Application: Additional Tips
• Typically at the end of your application, there will be an agreement regarding the fees associated with the loan, and a notes section applicable only to your borrowing situation. These can and should be discussed one-on-one with your lender.
• Make sure to double check and triple check that you have completed all the necessary questions and check boxes on the application. If anything is missing when the application reaches the bank’s loan underwriter, your application will likely be delayed another two to three weeks.
• When meeting with a banker to review a loan application, bring ample documentation, including a resume, credit report and past tax returns, as well as your business plan and balance sheets.
• Sin by excess of information. “It already seems like they’re asking for everything from your firstborn to your kitchen sink, but our policy has always been to do more than they ask,” said Anne Barr, Vice President of Venture Opportunities, based in Dallas, which advises entrepreneurs on financing. business purchases. “Add a sheet if you need it, because the more they know, the more confident they can be that they’re willing to take the risk on your business.”
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