Expert Series: Preparing for Your Business Loan Application

May 2nd, 2023

Starting a new business, refinancing, acquiring an existing one, or needing capital for your business can be confusing and intimidating. You must stay organized and confident as you begin the first steps in the loan application process.

We have interviewed Wallis Bank’s Sugar Land Area President, Aziz Rahim, to help our readers be more prepared and informed as they prepare for their application and initial lender meeting. Aziz has been in the banking industry for almost 20 years and has been with the Wallis Bank family since 2011. He specializes in SBA and conventional lending. He is currently active within numerous communities, giving presentations on SBA and commercial lending. Continue reading for advice from a well-experienced lender on how to be prepared for your business loan application process.

How Do You Know You Are Ready to Apply?

The American Dream is to own your business. Whether you are ready or not is a different story. People start a business for various reasons, such as passion, better income, hobbies, experience, and more. Whether it’s a start-up or funds for an existing business, a thorough business plan is crucial. A business plan outlines everything from the initial application to financials. Even the process of creating a business plan can help a business determine if they are ready to apply for a loan. A business plan can expose holes in your application, and at that point, you realize that you need to do more homework before you apply with the bank. Many companies offer help with creating your business plan. One company that I always recommend to my clients is www.SCORE.org. SCORE is a non-profit organization that has mentors who are certified, trained, and qualified to mentor clients, including existing businesses and start-up clients. SCORE mentors are proficient in guiding a client on business basics. They deliver business training, teach new concepts, and engage small business audiences in online presentations. Best of all, it’s 100% free! I encourage any new business owner to meet with a SCORE mentor to help create a business plan.

How Do You Choose the Right Lender?

Different lenders have various loan appetites, and choosing the correct lender for your type of business is not only essential but will save you time. Conduct research online about the different lenders you are interested in meeting with to help narrow down which lender could be right for you. Ask about the lender’s history for your type of business. Does the lender have a history of doing loans in your industry? What industries does the lender focus on? What is the process and time frame of the loan process? These questions about the lending process should be addressed in your initial meeting with a lender. Choosing the right lender is just as important as a lender choosing you. A good, well-informed lender will guide you to the best possible loan for your business. The U.S Small Business Administration, or SBA, loan program is a valuable resource, as they have various types of loans that will suit your needs. A helpful lender will learn and understand your business in order to guide you to the best SBA loan for you.

What Documents are Required?

The documents required depend on the type of loan you’re applying for. To purchase an existing business, the seller’s three-year financials and an up-to-date interim statement are required.
If you’re expanding your business, need additional equipment, or need working capital, your business’s 3-year financials and up-to-date interim statement are required.
Regardless of the loan type, personal tax returns and personal financial statements of all guarantors will be required. Other documents will come into play as well. A best practice is to speak to the lender during the initial meeting of the loan process and ask as many questions as possible so you are well-prepared.

What Are Some Key Indicators of an Application that Will Be Accepted? What Are Lenders Looking For? Credit Score? History?

Lenders are looking at the loan as a whole. A good lender will look at every aspect of the applicant and not just focus on one point. This is where the 5 Cs come into play.
Credit – Credit behavior is based on indicators like your credit report, score, and payment history.
Capital – How much of your own money are you investing in your business? This is often a down payment.
Conditions – Market analysis of the trends of your industry and the economy. Is the industry you are tapping into doing well?
Collateral – An asset you pledge to back the loan. Collateral could come in the form of your business’s property, warehouses, equipment, and more.
Capacity – Your financial ability to pay the lender back by comparing your income to expenses.

Do You Need to Have an Equity Injection?

In short, yes. The lender wants to see how much of your ‘skin is in the game.’ Depending on the type of loan or project, the lender will determine how much equity injection is needed from the borrower. A few example factors include: if the loan is a start-up or existing, is real estate involved, and the type of industry. A common misconception of SBA loans is that the SBA sets the required cash injection. It’s actually the bank that sets the capital needed in accordance with the SBA guidelines. The initial meeting with the lender will help you better understand what is required for the down payment. Please note: what they require and what they need after loan approval may vary.

Closing Thoughts

You may think that you will never be ready to take those first steps to start your dream business, but hopefully, these tips will help you feel more confident as you walk into your first meeting!