Choosing a loan to finance your business comes with a variety of benefits, including growth – but do you know what a lender considers before they decide to approve your application?
Your business finances must be in good shape to give yourself the best chance of approval.
There are a few documents that need the most consideration when applying for a loan, which we will look at in more detail below, which can boost your chances of being awarded a quick business loan online.
Read on as we look at the 3 financial reports you’ll need to guarantee loan approval, how you can improve them and other considerations you’ll need to think about!
Profit and Loss Report
This report is usually asked for by lenders when you are applying for business finance.
This report allows lenders to see whether you have made a profit or a loss, and within this report, it will show your outgoings, like invoices, bills and expenses and combine them and take them away from how much revenue you have made.
Whatever you have left over is either a profit or a loss.
The reason that this report is so important when it comes to a lender’s decision is that they need to see that you are in profit each month because this means you’ll have money left over to pay the loan that you are asking them for.
If you are thinking about taking out a loan in the future and you need to improve your profit and loss report, you should look at ways in which you can reduce your expenditure and improve your revenue.
Business Balance Sheet
Lenders can use your balance sheet to give them an idea of how your business is doing financially at a certain point in time.
On your balance sheet, you will find three areas, your assets, which refers to anything your business owns, liabilities, which refers to what your company owes in bills and debts, as well as equities which are shareholder stakes in the company.
Potential lenders will use this balance sheet to see the funds you have available compared to which are tied up in other areas.
They will also use liabilities to see how much you owe others.
You can improve your balance sheet by getting rid of any assets you don’t need to help you reach your financial goals, which means you can release funds from being tied up elsewhere.
Cash flow statement
Your cash flow statement gives an overview of the money coming in and going out of your business.
It goes into more detail than your profit and loss report and gives your potential lender an idea of how much money is actually leftover each month and can help them to see how well you manage your finances.
Your lenders would like to see positive results from your business each month, to show them that you’ll be able to make the repayments that are required in line with the finance option you choose.
If your cash flow statement shows that you don’t have enough money left each month to pay back finance, you should try and increase profit margins by studying patterns and cutting any unnecessary spending.
When applying for a loan, of course, it is important that you have these 3 reports to help you towards approval, but there are a few other factors to think about too.
Your credit score plays an important part in how likely you are to be approved for a loan – it shows lenders how creditworthy you are and allows them to decide whether they think it is sensible to lend to you.
You should make sure you check your credit score to see where you stand. To ensure that your credit score is in the best position for you to be approved for loans, paying off your debt on time and in full is crucial.
Your debt-to-income ratio will also be measured by lenders.
This shows them how much of your income each month is dedicated to debt – it is worked out as a percentage, and if it is too high, typically over 40%, it is likely your application will be declined.
To improve your DTI ratio, you should work to pay your debt off quickly, and avoid taking on any new debt.
Which lender is best?
If you have decided that you would like to apply for a loan to benefit your business, there are various lenders that you could try so that you get the best deal.
Your bank is the first place that you should look – if you have been banking with them since starting your business, they will most likely offer you a good deal so that they keep you as a customer.
The benefit of choosing a bank is that they have a huge range of loans available with varying amounts of funds, so there is likely to be a loan perfect for you, one of the downsides is that they may not lend to new businesses under 2 years old.
Online and independent lenders are popular because of their fast applications and approvals, and with so many available to choose from, it can be difficult to know where to start.
There are a few things that you should keep in mind, such as looking for ratings and reviews, this can help you to know whether your lender is trustworthy – if it seems too good to be true, it probably is.
Once you have narrowed down your search, compare the lenders you’ve chosen on their interest rates and terms to find out which works best for you.
Great customer service is also key, you should make sure you can contact them easily – look for web chats, email, and phone numbers.