11 Things to Do Before Applying for a Loan

Whether you’re a first-time applicant or a seasoned vet, the prospect of applying for a loan can be daunting. However, adequate preparation can make the process a far easier one. Here are eleven suggestions for things to do before you visit the bank or apply for a loan:

1. DEFINE YOUR REASONING

Why does your business need a loan? It may seem like a simple enough question, but knowing how to respond concisely is the most important part of applying for a loan. Lenders will want to know exactly why you are looking to borrow money, how much you will need, and how the loan will impact your business. Loans for “general improvements” aren’t going to be approved; your lender wants to see that you’ve spent time carefully thinking about what aspect of your business you’d like to invest in and how that investment is going to pay off. In general, loans for improvements that are tangible, retain their value, and that could be repossessed if necessary are the most likely to be approved, while loans for debt consolidation, salary, or the purchase of a non-essential asset are likely to be denied.

2. CALCULATE COSTS

While focusing on the long-term benefits of your loan may be tempting, don’t overlook the daily, weekly, or monthly payments you’ll be expected to make. You want to find a loan that will both give you access to the funds you need and that you will realistically be able to pay off. A business that has $300K per year in total sales simply is not going to be approved for a million dollar loan (without serious collateral, that is). Remember that any financial benefits your business may see as a result of the loan will take time to show up, so it’s important to find a loan with payments that you can afford right now.

3. DO YOUR RESEARCH

Don’t just go with the large bank down the road because you assume they will have the best deals. There are many factors that are involved in the true cost of a loan (interest rates, length of loan, monthly payments, etc.) and it’s important to calculate these costs for every lender. Don’t forget about merchant cash advance companies, micro-lenders, credit unions, peer-to-peer networks, and commercial lenders as options beyond the bank that may be better suited for your needs, and talk to fellow entrepreneurs in your area about their experiences. Whatever you do, don’t apply to a bunch of companies all at once; inquiries do show up on your credit report, and lots of inquiries over a short period of time will indicate desperation to potential lenders and may even negatively affect your score.

4. CHECK YOUR BUSINESS LICENSES

Verify that you are up-to-date on all of your state, local, and other required business licenses. Every lender you speak with will check these before funding you, and you don’t want to be caught neglecting to take care of simple responsibilities for your business.

5. KEEP YOUR PARTNERS INFORMED

If you don’t personally own over 75% of your business, you will need to involve your partners in the application process. Be sure that everyone is on the same page about the need for a loan and the amount. Your lender will want all of the business owners involved, and your partners should be prepared to submit additional personal documentation if necessary.

6. KNOW YOUR SCORES

Expect lenders to check both your business’ credit score and your own. It’s very hard to improve a low score, but you can always do some cleaning up before you apply. There are occasionally errors in credit reports, and you’ll want to catch these long before you begin the application process to give the reporting agencies time to fix your score.

7. HAVE A BUSINESS PLAN

Business plans are often the first thing lenders look at when considering your application; a poorly put-together business plan may be the last thing they look at too. It’s incredibly important to make a good first impression with your potential lender, and you want to come across as competent and knowledgeable about your business. Your lender will take you far more seriously if you show up with your business plan in hand. Good business plans will be extensive and will require lots of work, but taking the time to carefully develop your plan could easily be the difference between your application being quickly discarded or followed-up on.

8. MAKE SURE YOUR LOCATION IS CORRECT ONLINE

Do you own a new building, or have you recently changed location? Double-check that your new address is on your Yelp page and website. Your lender will probably run a quick Internet search on your reported location, and you don’t want them dismissing your application as fraudulent because according to Google Maps, your address is still an abandoned lot.

9. UNDERSTAND YOUR COLLATERAL

Many—although not all—lenders will require some form of collateral before agreeing to lend to you. While there are many things you could list as collateral, lenders generally prefer tangible options such as property or equipment that could be sold if necessary. If you choose to go with a loan that does require collateral, go through the appraisal process beforehand to get an accurate idea of the worth of your options. Your lender will want to see some type of recent documentation specifying that the item or items you are using as collateral is actually worth what you say it is. Don’t forget that this is something you could be giving up if you don’t pay your loan off; do the potential benefits outweigh the certain risks?

10. FIND DOCUMENTATION TO VERIFY YOUR BUSINESS’ HISTORY

Your lender will want to see current bank statements, credit card statements, and tax returns and may also require additional documentation to verify that your business has been operating in the way that you say it has. Collect this information before you apply! Your lender will expect you to be adequately prepared by the time you are applying for your loan, and it will reflect poorly on you if you aren’t.

11. APPLY AHEAD OF TIME

Perhaps one of the worst things you can do when applying for a loan is wait until the last minute. Ideally, you should apply for a loan long before you need the money. The more urgent your need for funds, the more desperate you’ll come across to your lenders, and the less likely you are to be approved for the loan. It’s always easier to get ahold of the funds you need if you apply long before you actually need them.