“You Have to Spend Money to Make Money”

If you are into any business, then this adage is surely familiar to you. Every business at some point needs a good cash flow to reach new heights. Moreover, in the case of small businesses, this usually becomes a necessity to take a loan for running smoothly. Small businesses have several growth strategies in the pipeline but because of the strain on the cash flow, they are unable to execute, and thus, it results in a loss of opportunity for the businesses.

A line of credit or a business loan enables entrepreneurs to take on large projects and attain growth. It is a simple solution to all the financial needs of your business.

Financial institutions do lend capital to small businesses or startups. Because of various planned or unplanned requirements, businesses urge monetary support. There are required plenty of documents along with multiple verification checks before granting a loan to any business.

So, here is the list of some of the mandatory aspects that banks took into consideration before granting a small business loan. Let’s check:

• Collateral

To back up a business loan, it is essential to have some good assets that can be pledged against the loan. Banks or any other financial institutions carefully evaluate these assets, as they are held against the risk a bank takes while offering a loan to small businesses.

For example: If any business pledges its Account Receivable against the request for a commercial loan, then, in that case, the bank would be verifying all the major receivables accounts. To get assured about the market reputation and solvency of the business, such verifications become necessary for the banks. Usually, a portion of the pledged asset is accepted such as approximately 50% - 75% of the total property value. Also, many evaluations are performed to make sure the collateral is not old or does not fall under the category of an obsolete inventory.

In a maximum of the collaterals, small businesses pledge their assets such as their house to get a business loan.

• Business Plan

When anyone asks for a small business loan, the banks need a business plan document in the majority of cases. It is not necessary to be detailed rather it can have only a summary of company details, financials, products, team, and the market.

• Financial Details

It comprises all the financial details of the business such as the present and past loans, credit card accounts, investment accounts, all banking accounts, and debts incurred. Also, the bank needs supporting documents such as address proof, tax ID numbers, contact details, etc.

• Accounts Receivable & Accounts Payable

While offering a small business loan, the bank needs complete data on accounts receivable to cross-verify the sales, credit, and payment history of the business. Accounts Payable includes almost similar info to accounts receivable but along with the credit references. To check and evaluate the payment behavior, the banks need this information too.

• Financial Statements

Financial statements are the mandatory documents required by all financial institutions that offer loans to small businesses. It includes a balance sheet that states everything about capital, business liabilities, and assets. It is necessary to provide the latest balance sheet so that adequate analysis can be performed. The banks can also ask for the last three years’ P&L statements to check the financial condition of the business.

• Personal Financial Details

The personal financial details include the net worth, social security numbers, and complete details of all the liabilities and assets such as vehicles, credit card accounts, auto loans, home, investment accounts, etc. In case there is more than one owner or the business is running in a partnership, then there would be requiring the personal financial statements of all the owners.

• Insurance

To reduce the risk, the banks may also ask the small businesses to have insurance against the decease of one or more business partners. That insurance makes the business liable to directly payout to the bank first on the death of the partner to pay off the loan amount.

• Past Returns

To check the credibility of the borrower, banks usually ask for both business as well as personal tax returns for the past 3 years. Disclosing this information holds significant importance as it helps to check the eligibility of the borrower.

Knowing the factors that financial institutions consider while assessing your loan application helps to increase your chances of success. Many times, taking a loan is the best decision to help keep your business afloat and make regular earnings. Thus, if you think you can meet these requirements, you are good to go for presenting your loan application to the lender.