Before you can get a cheque cut from a bank or other financial institution for your business, the lending institution is going to want some information. Often businesses assume that all they need is to fill-out a simple loan application and can find themselves caught off guard by what is required.
While every financial institution will have their own requirements, many documents are mandatory across all lenders. Before applying, here are the basics to keep in mind.
First, decide what the money will be used for. The reasons for the loan are important for determining the type of credit you need to apply for. For instance, if you’re looking for financing to purchase equipment or real estate, then the bank will have a clear idea of terms and security for the loan. On the other hand, if the loan is for financing losses or acquiring non-essential business assets, then the bank may be more reluctant and request stricter terms.
Second, determine how much money is required. Underestimating the amount can lead to problems with working capital sooner than necessary. Overestimating can cause the bank to question your credibility. The best approach is to put together a well thought-out plan.
Most lenders will want to see a business plan, supported by complete financial statements and projections. Typically, it should include financial statements with a three-year history of earning like a profit loss statement, cash flow statement and balance sheet, and a current interim financial report. They’ll also want to review financial projections for the business over the next year or two. Regardless of how they were prepared; it is likely that the lender will insist that any financial statements be reviewed or audited by a Chartered Professional Accountant (CPA) firm.
Depending on the type of loan you’re applying for, other documents that may be required to include legal documents, collateral, business credit reports, insurance documents and the personal financial details of all the owners who have a significant share. Banks and other financial institutions these documents as part of their due diligence process.
Once you’ve prepared and collected all the documents, you’re ready to find a lender and prepare a loan application package for them based on their specific requirements.