Getting approved for a business loan or line of credit is more difficult than qualifying for a personal loan. It’s crucial that small business owners are adequately prepared to meet with a lender to present their business in the best possible light and qualify for the money they need.

Here’s what you can do to streamline the loan approval process for your small business.

Your business risk profile

One of the most important parts of any business loan application is demonstrating to a lender that your company is able to make regular payments and repay the loan in full. If your business is profitable, you can show you’re a low risk by presenting cash flow statements, a detailed business plan and, of course, your good credit history. Some of the most common reasons a bank won’t grant a loan to a small business are a lack of security (e.g. no business assets), a poor or non-existent credit history, business inexperience and/or a weak business plan.

Know your credit score

It’s highly recommended that you review your credit score before you apply for financing. That way you’ll know whether it might be better to wait until you’re in a better position to qualify. Check that your report is complete or free of any errors that can affect your score. Your credit report includes your payment history for credit cards, equipment leases, mortgage or office rentals, electricity, phone fees and other business expenses. A simple omission – say your internet provider, whom you always pay on time, isn’t included in your payment history – can result in your credit score being lower than it should be, so be sure to correct any errors immediately.

Before you apply for financing

If you suspect a lender will decide your business is too high risk for a loan, or you’ve been denied financing, apply for business credit instead. Your spending limit may be low to begin with, but a credit card will give you that opportunity to build a good credit history. Pay off your balance – or, at the very least, make your minimum payment each month. Keep up with your other financial obligations, too, such as any personal loan payments, rent, leased equipment and any income taxes owing. Apply for a loan in six months to a year and you’ll have a much better chance of approval.

Before you apply, be sure you have all the documentation needed to support your loan application. Include in your portfolio copies of business banking statements, financial reports, a detailed business plan including projections and a well-researched marketing plan.

You should also be prepared to discuss with a lender why you need to borrow the amount you’re asking for, the length of term and how your business can afford to repay it. Make a strong case for funding by demonstrating profitability, a good credit history and a solid business plan, and you’ll be in an excellent position to qualify for the funds you need to grow your business.

The post Why banks won’t lend to a business appeared first on Dudley & Associates, Chartered Professional Accountants.

Taking the time to regularly review financial statements can help you assess and improve current performance, avoid risk and make scalable plans for future growth.

Protect your company’s financial health by learning your way around these three financial reports.

Cash flow statement

The cash flow statement is arguably the most important report for small busineses. Over 68% of small business owners fear losing their business due to a lack of available cash.

How can this financial report help you avoid such a dangerous pitfall? By revealing precisely where you’ve allocated cash – and if you’re at risk of running out of it.

Monthly examination of your cash flow statement can help you predict and forestall a “cash crunch” by tracking:

• The in and out flow of money for operational activities; investments (such as the purchase of office equipment or the sale of portfolio holdings); and financing (such as loan repayments);
• Whether your net operating cash flow is less than your profits after tax (which means you’re spending more than you earn);
• Overarching trends that show cash runs low in some months and higher in others, so you take steps to build a reserve and ensure continuous “cash on hand”.

Profit and loss statement

Your profit and loss statement (also known as an income statement) summarizes the revenue, costs and expenses your business has incurred over a month, fiscal quarter or year.

In order to give you an accurate overview of your financial performance, the profit and loss statement typically breaks down into three sections:

1. Your revenue (known as the “top line”).
2. The total costs of doing business, such as operating expenses, research and product development, and expenses associated with taxes and interest.
3. Your net income (the often quoted “bottom line”), which is what remains when the costs of doing business are subtracted from your top line revenue.

The profit and loss statement can be used to calculate a number of important key metrics, such as your gross profit margin, operating profit margin and operating ratio.

Balance sheet

The third invaluable financial report for small businesses is the balance sheet. The balance sheet summarizes what your company owns (assets), what you owe (liabilities) and the current value of your business to investors (shareholder equity).

What exactly is being “balanced” on the balance sheet? In simple terms, the assets you own must balance out against the money you’ve borrowed.

Your assets may include cash in the bank, short-term investments, accounts receivable, inventory, equipment and property.

Your liabilities may include a bank line of credit, accounts payable, wages payable, rent, tax, and utilities.

Together with the cash flow and profit and loss statements, the balance sheet provides crucial insight into your company’s operations and overall performance.

Final Tip

Have your accountant walk you through each report, so you’ll feel comfortable reviewing them independently on a regular basis. It’s well worth the effort! When you understand your company’s key financial data, you pave the way to smarter decision-making and more sustainable growth for your small business.

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