Preparing for a business loan is not the same as preparing for a home loan. Many banks are not willing to advance large sums of money for start up ventures unless there is some solid proof of your creditworthiness. These financial documents are referred to as business loans and they are an essential part of getting the money you need to get your business off the ground.
Unfortunately, many business owners try to take out loans themselves and either do not prepare the necessary financial documents or fail to submit them in a format that the banks will accept. The result? Banks deny their business loans or require excessive upfront fees. If you are planning to apply for such loans, here is what you need to know.
Business Expenses – Before you even submit an application, make a list of all your regular expenses. This includes business taxes, gas, utilities, repairs and maintenance, groceries, and even personal telephone bills. Include any car repairs or vehicle maintenance that you must pay for. This list will give the bank an idea of what your income is and it will also help to qualify you for a business loan. The more that the lender knows about your lifestyle, the easier it will be to qualify for the proper amount.
Private Placement & Crowdfunding – Several small business owners are turning to private placement and crowdfunding to help raise capital. This process allows investors to purchase a percentage of the company instead of putting up all of the capital. While it does not qualify you for a standard loan, if you are able to raise enough through this method to pay back the lender, it can help you to qualify for a commercial real estate loan.
Deductible Interest – It is very important that business owners keep up with their loan payments. A great way to save money on the interest is to deduct the interest as an itemized deduction on their taxes. If the business owner has to pay off the loan with money that they have already earned, they will be able to deduct the interest paid on the loan. The amount that can be deducted is determined by the tax laws in your state.
Capitalization & Restrictions – Business loan interest that is used for operational expenses should be capitalized according to the estimated cost. All of the equipment, machinery, and furnishings used in the business should be included in this figure. All of the property and fixtures that can be utilized for the operation of the business should also be capitalized, like office furniture.
Many Small Businesses – In today's economy many small businesses are going under because of not having the right kind of financing to help them through the tough times. To prevent . . . . . . such a situation, small business loan interest can be used to help such businesses stay afloat. There are many different kinds of loans available to businesses, and some lenders specialize in certain types of financing. To get the proper financing, it is important to talk to various lenders to find out which one is the best choice for the particular situation. Using the Small Business Association or other organization for loan information and to find out what kind of financing options are available to the borrower. Doing so will ensure that the business can continue to operate even during a rough economic climate.
Payment Requirements – Another important aspect to business financing is the payment requirements of the borrower. Many banks and lending institutions require that borrowers have a significant level of equity before they will consider approving a loan. This means that the borrower must have enough value of property (equity) to guarantee payment in case the borrower defaults on the loan. Lenders use this as the main basis for deciding whether to advance the money to the borrower or not. Having a significant amount of equity ensures approval much more often than not, and banks are more likely to approve these kinds of loans.