Getting a loan application ready can be daunting and puzzling. But you don’t need to know all the answers. Lenders, like Farm Credit East, can provide resources and guidance to assist you in determining if a loan is the best answer for you and what you will need to apply and qualify for one.
There are certain characteristics lenders look for when considering a business loan application. You will want to present a clear plan about your overall business, your experience, your strengths and weaknesses, key advisors, and how you will use the money you borrow and pay it back.
You will want to be familiar with the financial condition of your business and have all your financial information ready to share. You should also weigh the pros and cons of each of the various financing options against your business goals.
The following four steps aim to provide clarity into the process as you consider a loan application.
Step 1: Your Business Model and Situation
To help you decide whether you are ready to apply for a loan, consider the following questions. This is the type of information a lender will want to learn about with your business.
- Do you have a clear plan in place defining goals and markers of success?
- What is the management structure and are employees’ roles and responsibilities understood?
- Does the business have a legal structure (sole proprietor, LLC, Corp, etc.)?
- Do you have an established market for the products and/or have you researched new markets?
- Are your financial statements readily available?
- Are you willing to be transparent about your personal and business financial condition?
- Do you have sufficient insurance (crop, property, liability, workers compensation) where applicable?
- Does the business comply with state and federal laws regarding labor, pesticides, runoff, food safety, market rules and regulations, etc.?
Step 2: Assess Whether Debt is the Answer
A loan can propel your business forward, but debt can also hold the business back. Here are questions to ask yourself as you consider a loan.
- What is the purpose of the loan?
- Can you explain how it will improve your business?
- Have you determined how the business can repay the loan?
- Does the requested loan term match the expected life of the purpose? For example, real estate loans are much longer than operating loans.
- Do you have a plan for raising additional revenue to cover the loan payments should you experience a setback?
Step 3: Getting Ready to Talk to a Lender
Once you have determined that a loan is right for your business, the next step is to speak with a commercial lender. This conversation will help determine whether you are ready to apply or if there is more information or resources needed. The table below lists questions the lender may ask that you should be prepared to answer. The most important question in each section is in bold.
What a lender is listening for
What is your business?
How does your business make money?
What is the purpose of the loan?
How much cash did you, or are you able to put
into your business and this project?
How will you repay this loan?
Have you experienced any extraordinary
incident(s) impacting the business? (COVID,
drought, frost, etc.)
Step 4: Supporting Documents to get in Order
When it is time to apply for a loan, supporting documents are often required. This list is not comprehensive and will vary depending on the lender and the purpose of the loan.
All applications require
- Signed loan application specific to the lender
- Two years of business and personal tax returns, year-to-date Business Profit & Loss, and Balance Sheets
- Personal Financial Statements (Balance Sheets) from anyone who owns 20% or more of the business
Other documents that may be required
- Business plan with financial projections for the next 12-36 months
- Lease agreement(s) if leasing space or land
- Operating Agreement/bylaws
For more information on the documents Farm Credit East requires to submit a loan application, please review this blog article, Loan Application Essentials: What you need to apply.
Ultimately, the loan process allows both the borrower and the lender to have a clear understanding of the contractual agreement both parties are proposing to enter into an agreement that will allow both parties to perform up to expectations.
Ready to get started? Farm Credit East is committed to agriculture, commercial fishing and forest products, and ready to help with your financing needs.
Contact a local office to be connected with a loan officer who can help you get started today!
The above information was compiled in collaboration between multiple lenders, including Farm Credit East, U.S. Department of Agriculture, U.S. Small Business Administration, New Hampshire Extension, New Hampshire Department of Food and Markets, Vital Communities, Community Loan Fund, Walden Mutual Bank and Land For Good. The goal is to help prepare the borrowers by making the loan application process clear, transparent and supportive.