Small Business Loan Guide: What Lenders Look For and How to Prepare

Small business loans can be instrumental in achieving your business goals. For new entrepreneurs, a loan can help cover essential startup costs like equipment, inventory, and working capital to get your business off the ground. For established owners, it can provide the capital needed to purchase real estate, open new locations, or expand into new markets. A loan can also offer a crucial financial cushion for unexpected expenses or market shifts.

Before you begin the application process, there are three questions to ask yourself to ensure you are positioning your business for success.

1. Do I have a reliable and predictable stream of revenue to support loan repayment?

Cash flow is the first thing lenders will examine. You will need to show that your business generates a steady stream of revenue, and you have a strong track record of managing your finances. To prove you have the capacity to repay, you should prepare recent financial documents, including balance sheets, income statements, bank statements, and tax returns for you, and co-owners, and the business. Lenders will look at your business and personal credit history to see evidence that you have handled your finances responsibly. Together, these documents demonstrate your financial stability and help lenders feel confident that you are a reliable partner who can make payments consistently over the loan term.

2. How will taking on a small business loan affect my business’ finances, including my ability to repay it, cash flow, and any unexpected challenges?

 Small business loans should help your business grow, not slow down. It is important to understand the terms of the loan and if the rate is variable or fixed. This is to ensure that you are able to comfortably manage payments throughout the loan term while covering ongoing business expenses and any unexpected costs that may arise.

It is also key to share with your Business Banker how you plan to use the funds, so they can recommend the best lending solution for your specific need.

• Term Loans are the appropriate vehicle for large, long-term expenses like business acquisitions, debt consolidation, real estate purchases, or significant equipment upgrades.
• Lines of Credit give revolving access to capital for flexible access to funds for managing seasonality, covering accounts receivable gaps, or making occasional inventory purchases.

The right financing, regardless of the term, should strengthen your cash flow at every stage of your business’s growth.

3. What do I need this loan for, and how will it support the growth of my business?

Before you talk to a lender, you should identify the purpose of your business loan and how it will support your company’s continued success. If you can clearly demonstrate to a lender how the loan is going to support and grow your business, you are in a strong position to borrow. Your Business Banker will seek to understand you using a framework known as “Five Cs of Credit”.

• Character: Your credit history and reputation.
• Capacity: Your ability to repay the loan.
• Capital: The amount of money you have invested in the business along with cash flow.
• Collateral: Assets available to pledge as security for the loan.
• Conditions: The loan type, amount, and term.

Whether you’re financing real estate or day-to-day operations, communicating a clear plan shows the lender that the loan will bring lasting value to your business.

Common Deal Killers

While a strong business case is essential, certain missteps can stop an application in its tracks. Here are some common deal killers to avoid:

• A Vague Business Plan: Lenders need to see more than just a good idea; they need a clear and realistic plan that outlines how the loan will be repaid. Your application is your chance to prove that you are a reliable borrower.
• Disorganized Financial Records: Inaccurate or messy financial documents are a major red flag. They suggest poor management and can make it impossible for a lender to verify your capacity to repay. Keeping business and personal accounts separate, as recommended by the Internal Revenue Service, can simplify this recordkeeping.
• Poor Personal Credit: Especially for newer businesses, your personal credit score serves as an indicator for your financial discipline. A low score can signal a higher risk to the lender.

Build Your Success with the Right Partner

With thoughtful preparation and the right lending partner, securing a small business loan can be a smart step toward building long-term success. As a trusted advisor for nearly 200 years, our Business Bankers are here to have open conversations about your goals and any potential roadblocks. Contact a WSFS Associate to discuss your financing needs and build a plan for your business’s future.