5 Things to Consider Before Applying for a Business Loan

Securing a business loan is a huge milestone in your company’s growth. Whether you’re securing real estate, building a new facility, or investing in equipment or inventory, a business loan provides you with the funds you need to take your business to the next level.

To help you navigate this impactful decision with confidence, we’ve outlined five things every business owner should consider before applying for a business loan.

Loan Purpose

There are several types of business loans, each one serving a different purpose. Being able to clearly identify the purpose you need the loan to serve will help our Relationship Managers determine which one is right for you and your business goals.

• Business Term Loans: Used for major business expenses like real estate, equipment, and working capital
• Equipment Loans: Used to purchase machinery, vehicles, or technology
• Commercial Construction & Commercial Real Estate Loans: For buying or constructing on income-producing property
• SBA Loans: Government-backed loans specifically designed for small businesses under $15M (as of publish date)
• Lines of Credit: Flexible borrowing for day-to-day operations

Business Impact

Taking on debt will affect your business’s financial standing both immediately and over time.

• Credit Score: Through the application process, a hard inquiry into your credit will be made. Be prepared for your credit score to drop a few points. Know that missed or late payments can have long-term consequences.
• Timing: Assess if now is the right time to take on additional debt. Ask yourself if your business can reasonably handle the monthly payments, if the benefits of the loan are worth the cost, and if your business is forecasted to generate enough revenue to cover the payments without compromising operations.

The loan should help your business grow in a sustainable way and not put a hefty strain on resources.

Documentation

Lenders will review all documentation to ensure your ability to repay the loan. You’ll need to be able to provide up-to-date documentation.

• Business Plan: Outlines your strategy, operations, and accurate financial projections
• Financial Statements: Profit and loss statements, balance sheets, and income and cash flow reports
• Entity Documents: Business Licenses, articles of incorporation, and ownership agreements
• Tax Returns: Business and personal, typically for the past 3 years
• Debt Schedule: Current debts and their terms

Loan Structure and Collateral

Business loan collateral is an asset that you pledge to a lender to secure your loan. It acts as a “safety net” for the lender in the event you fail to repay your loan. The lender can seize and sell the collateral to recover their funds. Common examples include accounts receivable, real estate, inventory, equipment, or your personal assets. Assess before talking to a lender what you’re willing to put up as collateral should also have contingencies in place in case of unexpected financial hardship.

Your lender will work with you to establish the structure of your loan, but going into the application, you should have a good idea of the loan amount, rate, fees, and repayment term you’re comfortable with.

Creditworthiness

Both your business and personal credit scores will be considered, and a personal guarantee is usually required on a business loan. So, a healthy credit score and strong credit history is recommended, as it shows reliability and a higher likelihood of repaying the loan consistently and on time.

If your scores are not optimal, consider improving them before applying. Try paying down existing debt, rectifying possible errors on your credit report, or taking time to better establish your credit.

A business loan has the power to shape the future of your business. Whether you’re building new facilities, acquiring real estate, hiring new employees, upgrading equipment, or purchasing inventory, applying for a business loan should be approached with careful planning and informed decision-making. By having a detailed understanding of your needs, preparing the proper documentation, and honestly evaluating your financial health, you can confidently pursue a business loan that will position your business toward improved efficiency and profitability.

Want to talk it over?

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