Learning & Insights
5 steps to take before applying for a business loan
Whether you're adding a new product, updating your equipment, or expanding into larger office space, you may need a loan to help cover the costs. There are several types of loans to consider, and when you decide to apply for one, it's a good idea to be prepared before starting the process. Here are five steps you can take to help prepare yourself to get the right loan for your circumstances.
1. Determine why you need a loan
The more clearly you define "why" you need a loan, the easier it will be to determine which type of loan will best meet your needs. For example, if you need to upgrade your computer system, you may consider a business loan designed specifically for purchasing equipment. If you'd like to maintain a steady cash flow, you may want to consider a business line of credit. Whatever the case may be, an honest assessment of why you need a loan will help you make your best choice.
2. Know your business credit score
Do you know your business credit score? If you don't, you can get it online at any of the national credit bureaus, including Equifax®, Experian® and TransUnion. This score isn't the same as your personal credit score; it's based on a variety of factors specific to the type of business you have and your payment history. If you need to improve your score, take steps to do so right away so you'll get the best deal possible on your loan.
3. Write a business plan
Here's where you get to tell your story. Some business loan applications require a business plan that provides a detailed description of your business; such as where you've been if you're already in business and where you want it to be in 1 year, 3 years or even 5 years. A well-written business plan demonstrates you were thorough in developing your business goals. If you choose to write your own business plan, there are many free online resources that can help. If writing a business plan is too far outside your comfort zone, you can always hire someone to help you write it.
4. Prepare your documents
While every bank has its own requirements, certain documents are typical requirements no matter which lender you use. Here are a few documents you'll need to prepare for the application process:
- Tax returns
- Financial statements, such as your profit and loss (P&L) statement, cash flow statement and balance sheet—and possibly, your business bank statements
- Legal documents, such as articles of incorporation, a franchise agreement, business license or permits
- Collateral appraisal (if applicable)
5. Research your options
Armed with the information above, you're ready to talk to a business banker. Gather your documentation and be prepared to discuss your business plan. Your business banker will guide you through the different available loan options and help you choose the one that's right for you.