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When Can You Use Business Loans Usa?

A small business loan is a type of commercial financing qualified businesses can get from traditional banks, online lenders and credit unions. Businesses can use funds to cover the costs that come with operating and growing a business, including everything from working capital and equipment purchases to larger purchases like real estate.

They said, “If you don’t believe…(see above).” And at that point I realized the truth in the old cynical joke that says banks will lend you money only if you don’t need it.

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One of the first things overly-optimistic entrepreneurs discover as they look for funding is that banks don’t fund business plans. In their defense, it would be against banking law if they did. Banks are dealing with depositors’ money. Would you want your bank to invest your checking account balance in a startup? I wouldn’t. And neither would the U.S. banking regulators.

So here’s what to expect a bank to ask for when you apply for a commercial loan for your business. There will be occasional exceptions to every rule, of course, but here’s the general rule:

  • Personal and business credit scores
  • Collateral
  • All of your business’s financial details
  • Complete details on Accounts Receivable
  • Complete details on Accounts Payable
  • Complete financial statements, preferably audited or reviewed
  • Business plan and loan proposal
  • Business and financial documentation

Personal and business credit scores

You’ll likely need good personal credit or excellent business credit to qualify for a government-backed SBA loan or traditional bank small-business loan. Online lenders may be more lenient with credit scores, emphasizing your business’s cash flow and track record instead.
Personal credit scores indicate your ability to repay personal debts, such as credit cards, car loans and a mortgage. Small-business lenders require a personal credit score because they want to see how you manage debt.
FICO scores, commonly used in lending decisions, range from 300 to 850 (the higher, the better). You can get a free credit score on NerdWallet and a free copy of your credit reports at AnnualCreditReport.com.
Fast ways to improve your personal credit include disputing any inaccuracies in your report and paying bills on time and in full.

Collateral

As I explained above, banks do lend money to startups. One exception to the rule is that the federal Small Business Administration (SBA) has programs that guarantee some portion of startup costs for new businesses so banks can lend them money with the government, reducing the banks’ risk.

So your business has to have hard assets it can pledge to back up a business loan. Banks look very carefully at these assets to make sure they reduce the risk. For example, when you pledge Accounts Receivable to support a commercial loan, the bank will check the major receivables accounts to make sure those companies are solvent; and they will accept only a portion, often 50 or sometimes 75%, of receivables to back a loan. When you get an inventory loan, the bank will accept only a percentage of the inventory and they will kick a lot of tires first, to make sure it isn’t old and obsolete inventory.

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The need for collateral also means that most small business owners have to pledge personal assets, usually house equity, to get a business loan.

All of your business’s financial details

That includes all current and past loans and debts incurred, all bank accounts, investment accounts, credit card accounts, and of course, supporting information including tax ID numbers, addresses, and complete contact information.

Complete details on Accounts Receivable

That includes aging, account-by-account information (for checking their credit), and sales and payment history.

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(And if you don’t know what your Accounts Receivable are, then count your blessings. If you had any, you’d know. Or, read our guide to find out.)

Complete details on Accounts Payable

That includes most of the same information as for Accounts Receivable and, in addition, they’ll want credit references, companies that sell to your business on account that can vouch for your payment behavior. If you need to know more about Accounts Payable, just read our guide that explains things simply.

Complete financial statements, preferably audited or reviewed

The balance sheet has to list all your business assets, liabilities and capital, and the latest balance sheet is the most important. Your Profit and Loss statements should normally go back at least three years, but exceptions can be made, occasionally, if you don’t have enough history, but you do have good credit and assets to pledge as collateral. You’ll also have to supply as much profit and loss history as you have, up to three years back.

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Regarding audited statements, having “audited” statements means you’ve paid a few thousand dollars to have a CPA go over them and take some formal responsibility for their accuracy. CPAs get sued over bad audits. The bigger your business, the more likely you’ll have audited statements ready as part of the normal course of business for reasons related to ownership and reporting responsibilities.

Having statements reviewed is a lot cheaper, more like a thousand dollars, because the CPAs who review your statements have way less liability if you got it wrong. Banks won’t always require audited or even reviewed statements because they always require collateral, assets at risk, so they care more about the value of the assets you pledge.

Business plan and loan proposal

Lenders will want to know how you plan to use the money and see that you have a strong ability to repay. They may require a business plan that explains what your business goals are and how you plan to reach them. Some lenders may also ask for a business loan proposal, which details the purpose of the loan and how you expect to repay it.
These documents should clearly demonstrate that you will have enough cash flow to cover ongoing business expenses and the new loan payments. This can give the lender more confidence in your business, increasing your chances at loan approval.

Business and financial documentation

Banks and other traditional lenders typically require a wide range of paperwork when you apply for a small-business loan. The financial and legal documents you may need for a small-business loan include:
  • Personal and business income tax returns.
  • Balance sheet and income statement.
  • Personal and business bank statements.
  • A photo of your driver’s license.
  • Commercial leases.
  • Business licenses.
  • Articles of incorporation.
  • A resume that shows relevant management or business experience.
  • Financial projections if you have a limited operating history.
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