One thing an entrepreneur never has enough of, is time. Whether it’s marketing, hiring, building your website, or managing your inventory — there’s always something else that needs to be done, and never enough time to do it. But when it’s time to grow their business, most entrepreneurs face a catch 22. Growing requires funding. And searching for funding, requires an upfront time investment. Researching loan options, finding the right lender, and working on applications can take hours. Most of the time, it requires multiple late nights and weekends. You find yourself managing paperwork, instead of managing your business. Plus, you will need to repeat the whole process over again with another lender if you are rejected. To minimize the time and effort of getting funded, you need a strong foundational understanding of what lenders are looking for, and what documents lenders need.
The 5 C’s of Credit
When lenders review loan applications, they make decisions based on a general framework called the 5 C’s of credit. The 5 C’s include:
- Character: A general opinion of your trustworthiness and credibility as a potential borrower. It’s important for a lender to know that you are responsible enough to repay a loan.
- Capacity: Your financial ability to repay a loan, also referred to in the 5 C’s as Cash Flow. Lenders want to know that you’re not only responsible, but financially able to make payments on time.
- Collateral: Your assets used to guarantee a loan. Think cars, equipment, or even your home — lenders want to know what backup they have if you cannot repay your loan.
- Capital: The amount of money invested in your business by you or other owners/investors. Banks, credit unions, and community lenders like to see that you’ve invested some of your own money and have “skin in the game.”
- Conditions: The overall status of your business (i.e., thriving vs. facing bankruptcy) and your intended purpose for the funding. Lenders want to minimize their risk, and successful businesses can repay more dependably.
In addition to the 5 C’s, lenders want to know you’ve been in business for 2+ years before they approve your loan. This helps them understand your track record during the approval process. It also ensures their loan serves as funding for an actual business, rather than a risky seed investment for a new idea.
Preparing Your Documents
Once you have a foundational understanding for what lenders are looking for, the next step is to prepare your documents ahead of time. To successfully analyze your application based on the 5 C’s, lenders need to review a plethora of documents.
As part of a business loan application, most lenders will ask to receive:
- Personal & Business Tax Returns: Be sure to pull your last 3 years of income tax returns, both personally and for your business.
- Resumes of Owners: Many lenders will require proof of management or business experience for those running your company. Whether it’s you or a business partner, make sure your resume is polished and ready to go.
- Financial Statements: Put together a package to help your lender review your application. This includes professionally prepared balance sheets, income and cash flow statements, as well as bank statements over the past year.
- Business Licenses & Registrations: This proves your business is official. Lenders will require legal documentation including business licenses and registrations required for you to conduct business.
- Articles of Incorporation: This further proves to a lender that your business is licensed and registered, so be sure to have it ready.
- Proof of Collateral (if required): Requirements vary from lender to lender, but the larger your requested loan, the more likely it is you will need collateral. Prepare a document that identifies the cost/value of personal or business property.
- Commercial Leases (if applicable): Think retail rental agreements or other documentation for the spaces where your business operates. Make copies and have these documents ready in case they are needed.
Take the Stress Out of Getting Funded
Applying for business funding can be stressful, and the headache it brings can challenge even the most dedicated entrepreneurs. Fortunately, proper planning helps the process go smoothly. In addition to matching you with the best local lenders, Backabl makes it easy to skip the paperwork with a streamlined, digital lending experience.
Ready to search for funding without the stress? Sign up for free today.