Getting “bank ready” is like exercising: it’s painful but it’s for your own good. Although getting your financials and documentation organized for a bank loan application can be time consuming, in the long run the bank will get you the low-cost (and long-term) financing you may need to grow your business.
Check out 5 easy ways to do the impossible and prepare for a bank loan.
1. Generate Cash Flows
A bank will not lend to a business unless it not generating cash to support debt payments. Cash flows are the monies that remain after all cash expenses have been subtracted from collected invoices/receivables. Usually a borrower will lend a business up to 80% of expected cash flows generated over the term of the loan. Banks will usually use your tax returns as a basis to calculate your annual cash flows, so be sure to give your business the credit it deserves when reporting taxes.
2. Build Business (and Personal) Credit History
Be sure to build business and personal credit history ahead of applying for a bank loan. For more information, read our article: Three Ways to Improve Your Business Credit.
3. Build Tangible Assets
Banks will look for tangible assets to collateralize the loan. Good examples include, but are not limited to, real estate, cash savings, equipment, or in some cases, an IRA account.
4. Document Your Progress
Maintain all documents of your business in terms of legal compliance and tax reporting. In addition, be sure to have proper reporting systems in place to generate financial reports required to underwrite the credit of your business.
5. Meet Your Banker
Go meet your banker and make sure they know YOU and your business. It will make your life a lot easier. At the end of the day, business is all about relationships, and you want your banker pounding the table for your business when it comes time to borrow.