In recent years, interest rates have increased and credit has tightened. Under these conditions, which are expected to persist in the coming months, securing a commercial loan can be challenging for businesses of all sizes. Whether you want to expand, stabilize your cash flow or simply build a financial cushion, being loan-ready is more critical — and more complicated — than it’s been in the past.
Here are some steps to help increase the odds that a bank will approve your company’s loan application.
Provide GAAP financial statements
Banks aren’t just looking for strong numbers in today’s cautious lending environment. They also want transparency and consistency. That’s why financial statements prepared under U.S. Generally Accepted Accounting Principles (GAAP) are essential.
GAAP financials give lenders a clear, apples-to-apples view of your business’s performance. GAAP requires accrual-basis accounting. On the income statement, this means sales are recorded when they’re earned, and expenses are reported when they’re incurred — regardless of when cash actually changes hands. A GAAP balance sheet may include accounts receivable, accounts payable, prepaid assets and accrued expenses. These accounts paint a complete, reliable picture of your business’s financial position.
If your financials aren’t already prepared in accordance with GAAP, it’s worth investing the time (and potentially enlisting outside help) to get them there before you apply for financing. GAAP financials could make all the difference.
Understand how your financial results stack up
Lenders use your financial statements to calculate key ratios and compare your business against industry benchmarks and its historical performance. Some ratios underwriters may scrutinize include:
- Profit margin (net income divided by sales),
- Receivables turnover (annual sales divided by average receivables balance),
- Inventory turnover (annual cost of goods sold divided by average inventory balance),
- Payables turnover (annual cost of goods sold divided by average payables balance),
- Current ratio (current assets divided by current liabilities),
- Debt-to-equity ratio (total debt divided by total owners’ equity), and
- Times interest earned ratio (earnings before interest expense and taxes divided by interest expense).
Your business will stand out if its financial performance reflects solid asset management, profitability and growth prospects. If there are red flags — such as low profits, aging receivables or high debt levels — have a detailed explanation and an improvement plan.
Prepare for comprehensive due diligence procedures
Today’s lenders want a complete picture of your business operations, leadership and future strategy. Be prepared for in-depth due diligence, including:
- Facility tours to assess your operations firsthand,
- Interviews with your leadership team,
- Reviews of marketing materials, pricing strategies, and key customer or supplier contracts, and
- Discussions about any discrepancies between your financial statements and tax returns.
Underwriters don’t just like to see that you’re currently profitable; they also want assurance that you’re building a resilient, well-run business that can repay the loans.
Additionally, you’ll need to explain how the loan funds will be used. Having a clear, realistic plan — whether it’s to expand your operations, invest in new equipment, increase headcount or manage seasonal cash flow — can significantly boost your credibility. Vague or overly ambitious plans can sink your application, even if your financials look strong.
Let’s get you loan-ready
Securing a loan requires more than filling out a few forms. You need a clear financial story, reliable financial records and a forward-looking business plan. We can help you apply for a business loan to position your business for success, even in tough times. Contact us to get the ball rolling.
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