As we enter the post-pandemic period, the financial world is experiencing pent-up demand from small businesses that are itching to expand. Banks and credit unions are seeing an increase from small business owners looking to take out loans for business expansion while interest rates are historically low. This is a great indicator of economic growth and recovery. As a small business owner seeking financing, make sure you go into the loan application process with all of your ducks in a row. Following is a list of information you will need when applying for a business loan, as well as some information about how to account for the loan proceeds once you’re approved.
What information do small businesses need in order to apply for a loan?
Show updated financials
Anytime you’re applying for a business loan, lenders will want to see all financial information for your business. You will be asked to show financial reports that include assets, liabilities, business debts, and business credits, as well as past tax returns. Make sure to have all of the information updated to show your current financial position. Utilizing a cloud-based accounting system such as Xero can help keep accounts up to date and will allow you to pull financial reports quickly when needed.
Keep your books up to date
Every business owner has had busy months where bookkeeping tasks and month-end reconciliations fall behind. If you are preparing to apply for a business loan, you will need to ensure that your books are up to date throughout the entire process. Working with a cloud accountant can help you accomplish the necessary clean-up work; in the process, your dedicated advisor can also look for any discrepancies in your accounts.
Ensure all assets and liabilities are accounted for
In order to show potential lenders an accurate financial picture, you must ensure all assets and liabilities are listed on your balance sheet. Assets should show their current fair market value. Liabilities should include all debts, accounts payable, interest, wages, and taxes owed.
Prepare an up-to-date P&L statement and balance sheet
Lenders will want to see your profit and loss statement, as well as a balance sheet to get an overall picture of your business financials. They will use this to analyze your cash flow, gross margin, debt-to-equity ratio, accounts payable, and accounts receivable. Be prepared to answer questions regarding these statements. Lenders will also prefer statements prepared or reviewed by a CPA.
If you need assistance with the preparation, clean up, reconciliation, or review of your books or financial statements, our team can assist you. We have extensive experience helping small business owners who are applying for a business loan and can help you show your financials in the best light.
How do you show a loan on your books?
Make sure it’s booked correctly
When you take out a small business loan, it is essential to account for the cash flow and liabilities correctly. You will either have a current liability if the loan is a short-term loan, or a long-term liability if the loan is long-term debt. The business should enter a debit to the cash account and a credit to the loan liability.
When making payments, the principal portion of the payment goes against the liability on your balance sheet. The interest portion is an expense on the P&L. It’s a common mistake of business owners to put the entire payment on the P&L, which ends up overstating your expenses.
Use the amortization schedule from your lender
At your loan closing, you’ll receive an amortization schedule from the lender. This document will show you how much you are paying on principal and interest every month. It’s a great tool to use both prior to taking a loan and once you have the loan. Prior to taking out a loan, you can estimate your monthly payments based on the interest rate, loan amount, and duration of the loan to make sure you can afford the loan. While each payment will be the same amount, the blend of principal and interest will change over the duration of the year. The percentage of each payment that goes towards interest decreases over time, while the percentage of payment that goes towards principal increases.
If you find yourself looking to expand your business, our experienced team is here to help you along the way. From applying for a business loan to properly accounting for the capital, and all of the daily bookkeeping tasks that come along with the business, we are here to save you time and improve your financials. Contact us to set up a consultation.
If you prefer to DIY your books, check out our free online course, designed to help small business owners improve their bookkeeping skills. 5 weeks to better bookkeeping covers the basics of bookkeeping, how to migrate your books to the cloud, and what to do if you’ve fallen behind on bookkeeping tasks.