How to Prepare Yourself Before Applying for a Small Business Loan Like a Pro?

Estimated reading time: 5 minutes, 41 seconds. Contains 1139 words.

You might be at the stage where you had prepared your business plan to open and operate your dream business. Also, you might think you have what it takes to seek some funding from a bank! But hold on, there are butterflies in your guts which you started to have ever since you thought you would need to approach your bank’s business account manager! In this article here, I will show you how to prep yourself for what it would take to present a solid portfolio for your account manager in a way that it covers most of what the bank would look for in submitting your top-notch small business loan application. Now, someone might ask that most of the below information is somehow more personal than the business! Here, the answer is simple; same way when you would apply for a credit card, the financial institution need to assess your creditworthiness, get to know your financials position much better and then decide that you weren’t going to end up defaulting on payments, run into negative cash flows where you wouldn’t be able to manage and also to see if you weren’t just going to use the bank’s money and declare bankruptcy just because you don’t care or don’t know how to run a business. Here are the things you would need to show and present to your business account manager when seeking a small business financial loan:

Requirement Number 1: The last 2-3 years of personal tax returns with copies of your most recent Notice of Assessments (NOA) filed and processed by the Canada Revenue Agency. For this requirement, the bank needs to simply verify your past few years of income compared to what they have on their systems. Please don’t inflate your income in an effort to show some muscles as banks have their ways to verify these details.

Requirement Number 2: City tax bill and Municipal Property Assessment Corporation statement of your personal residence. These types of statements are used to verify the value of your property(ies) and also value your monthly obligations in terms of monthly expenses.

Requirement Number 3: Two government-issued IDs for the principal(s). I’m sure your banker knows you, but these IDs need to be present on file to authenticate the applicants.

Requirement Number 4: Most recent bank statement, in general, your past three months of personal and business bank statements. These statements are used to verify that the down payment you would need to inject into the business is yours and not just quickly borrowed and arranged for the purpose of acquiring the loan and then has to be paid back to someone else, which in most times result in high exposure and over-leverage your cash situation.

Requirement Number 5: Your credit score report showing your current and most recent score. Now in most cases, banks favour excellent to good standing scores in processing loans, but sometimes certain fair score holders might qualify for applying. If you have some issues with your current credit score or would like to know more on how to fix your credit, please read this article “How to get a good credit score in Canada, Looking your best as a borrower can save you thousands” which was published by FINANCIAL POST.

Requirement Number 6: Need to submit or fill out a Net Worth Statement that most banks use to verify and estimate your net worth to them. Some banks have a link on their website to a Net Worth Calculator for you to quickly figure out your current net worth. However, besides this statement, the banks will use the numbers to quickly know the ratios for debt to income and net worth. Generally, a debt to income ratio of more than 40% is a “no-no” and any applicant with 60% and above of your net wroth ratio would be the one to entertain.

Requirement Number 7: Your Master Business Licence or Articles of incorporation. These documents are used to verify the legal name, ownership, and address of the business. In these documents, there are information to state the legal status of the applicant within the business and the authority of the principal applying for a small business financial loan.

Requirement Number 8: Premises lease agreement. For banks to approve a loan, most financial institutions sometimes have to see that for any brick and mortar store, shop, facility or office there is in place a 5+5 year-term with options for renewing lease agreement. In some instances, a letter of intent to lease might work as a pending file until an assessment of loan approval has been completed, but it would not guarantee the final approval of the loan until an actual lease agreement has been established.

Requirement Number 9: A detailed business plan with at least 2-5 years of financial projections. In this business plan, you will need to explain your business model, vision, mission, goals and objectives, a summary of the company, ownership of the business, location, products and/or services, nature of the industry you are going to be in, market analysis, market trends, your target market, demographics study, sales strategy, organizational chart, and personnel plan. For your financial projections, you will need to demonstrate your revenues, your operating and managerial expenses in order to show your income statement, your cash flow and how you are going to manage it and not run into a negative cash flow situation where you might default on some obligations. It would be best if you also showed how you are going to breakeven and start generating some profits. It is also good to include some ratio analysis of your projections to demonstrate how healthy your forecasts are and how you have managed to look at your financial position. Piece of advice, whenever you need to project your numbers, always be realistic and as close as possible to industry standards. For example, you may want to explore the Government of Canada website and look for Financial Performance Date. Once you reach that page, you will need to create a report using the most related NAICS code and estimated revenue to come up with all financial performance data including the business ratios. Another way is to use sources that are U.S.-based in which all provide valuable insight into how certain businesses are or should be performing in comparison to industry standards. You may also want to consult your local Board of Trade or the local Chamber of Commerce for ratio values specific to your geographical area, or the industry association for ratio values specific to your industry sector. You might also need to visit Statistics Canada, which maintains a very comprehensive library of financial statistics relevant to the Canadian economy, including current ratio values for most industry sectors.

(note: all above information, links, details and opinions on any hyperlink mentioned above are merely the opinions of the publisher(s) and Propitious Plans Consulting Group Ltd. hold no right to distribute, transmit or publish which is strictly prohibited)