Your Small Business Financing Checklist
By Margot Carmichael Lester, Staples® Contributing Writer
Going for a small business loan? No matter where its coming from, heres a quick checklist to help you prepare.
1. Use of proceeds. You cant just waltz in and ask for a wad of cash. Your lender wants to know how much you need and for what: working capital, equipment purchases, expansion, inventory or additional staff. And shell want to look over your budget for spending it to make sure the plan is sound. Many businesses simply run out of cash and die because business was too good, says Jo Clarkson, operations director for The Alternative Board in Westminster, CO. They over-trade and dont have the right working capital structure or provider to support what they need. Dont fall into that trap.
2. Business plan or lean start-up canvas. Many lenders want to see some kind of business plan, whether its the traditional format or the newer lean start-up model anything that clearly lays out your vision for the business and shows theres some there there. If you dont have a formal business plan, bring a résumé and be prepared to explain how you make money, advises Lisa Jackson, senior vice president for Triangle Business Banking at First Citizens Bank in Durham, NC. Who are your top clients? Who is your target market?
3. Legal documents. While youre at it, bring your businesss license and articles of incorporation many institutions use these to verify your business legal formation. Also good to have: franchise agreements, commercial leases and third-party contracts that show others have invested in you and that you have business lined up.
4. Three years of personal & business tax returns & schedules. Loan officers use your returns to verify your income and show trends in your earnings, investments and other financial activities.
5. Financial reports. Required documents vary, so be on the safe side and have the following ready: your profit and loss statement, a balance sheet no older than 90 days and your verified business credit rating. If youre a going concern, include aged accounts payable and receivable reports, too. Understand the numbers on the P&L and balance sheet, Jackson counsels. And while you can download this data from your accounting software, its still smart to have a professional look over your data before you apply for a loan to make sure its accurate and that you fully understand what the numbers say. Your lender may also want to see your verified personal credit rating, especially if you have yet to launch your business. This helps him determine whether you pay your bills on time and helps him verify your credit position.
6. Collateral. If you want to sweeten the deal or if you know youre a risky candidate, you can put up some collateral although collateralized loans may put your assets at serious risk. Have proof of the collaterals cost and value at the ready so it can be properly considered.
If that seems like a lot of paperwork, it is. Why would your lender need so much documentation? It comes down to two things:
1. Regulations. The days of the signature loan are gone. Lenders are heavily regulated now, Jackson explains. We are subject to audits and exams annually. If we make an exception, we need to provide proof of why we made it, and provide evidence that we would make the same exception for everyone.
2. Risk. Banks are not in the risk business, Clarkson notes. They are in the as little risk as possible business, and thats what you need to be able to demonstrate to them. If you need risk capital, dont go to a bank! For risk capital, go to a risk capital or equity funder. Banks will only lend if they have confidence in you that they will get their money back.
Of course, that creates challenges for some owners and entrepreneurs.
For a young business without financials and tax returns, it's often difficult to get financing from traditional sources, like banks and credit unions, admits Robert Diestel, head of credit marketing and global payment strategy for Staples. To make it easier, the company launched Staples Business Loans, powered by Lendio, a matching service that helps you find the right financing for your business.
There are creative ways to get what you need to get started, he says. Alternative finance companies, personal loans, credit cards, family and friends, promissory notes, merchant cash advances, and peer-to-peer are all sources used by creative and determined entrepreneurs these days. Explore all your options.