The Definitive Guide to Getting Loan Ready

Are you considering applying for a business loan, but not sure about the process or what a lender will ask for?

First, you’re not alone. Many successful entrepreneurs have questions and encounter obstacles before they succeed in securing a business loan.

Second, this guide is for you! It will lead you through a series of steps designed to inform, empower, and support. While we present this as a linear process, feel free to skip around. Depending on your situation, the order of steps may vary and you may want to work on several at once.

Welcome! Before we begin, we’d like to explain how we approach supporting entrepreneurs like you.

We believe you are capable, creative, and resourceful. Rather than seeking to fix or correct a lack, we focus on empowering you so you can take charge of your business journey and chart your path.
We understand it can be lonely. When you are working hard to start or grow a business, it’s easy to feel alone. We strive to be a partner and an advisor. We also connect you to other resources so you can strengthen your network and build a team.
We understand we don’t all start in the same place. While we believe change is possible and we champion your growth, we also understand that entrepreneurs face different challenges and realities.

How do these beliefs shape this resource?

We breakdown a complicated and potentially overwhelming topic into smaller steps and components. We also always try to explain specialized vocabulary or terminology.
We point you to other resources and present multiple voices and perspectives. We hope some will resonate with you and be useful.
We let you choose your path through this material. Ultimately, this is your journey!

If you’re serious about launching or growing a business, a business plan is a must.

A business plan is a roadmap for you and any potential partners and funders. You’ll also likely need a written business plan if you are seeking funding for a startup, for business expansion or for a business less than 2 years old.

A business plan:

summarizes your business, how it is structured, and your plans for the immediate future
explains who you will sell your goods and services to and how you will find your customers
analyzes your competition and the competitive advantage your business has in the market
identifies your strengths, weaknesses and what it will take to be profitable

A business plan can help you strategize and chart your course. Business plans come in many shapes and sizes. You can find some great resources to help you get started online.

Just as applying for a loan is a process, so too is creating a business plan. Give yourself time and don’t assume you can write one in a single sitting. Also, don’t worry if you can’t complete every single section. Whatever you can complete will help you and a written business plan is far more valuable than one that only exists in your head.

If you’re looking for help, you can connect with your nearest Small Business Development Center (SBDC). You can also find a business mentor through SCORE, a nonprofit that provides free services to entrepreneurs.

OUR CUSTOMERS

“Erika saw the value of what we were doing — and the value of myself and Jonathan Garrett my co-founder.”

- Sundown H, Chesed Farms, Walla Walla

“When Sundown first connected with me, he had a solid idea but didn’t have a business plan. I recommended he work with the local Small Business Development Center on a business plan. He put in that work, came back to Craft3, and we were able to make a loan for him to build out a new warehouse space.”

- Craft3 Senior Business Lender

DOWNLOADABLE RESOURCE

Unleash the Potential of Your Business with a Solid Plan

Having this section of the guide at your fingertips offline can be pretty handy. Whether you prefer a hard copy for reference, want to share the content without internet access, or just like having things neatly organized on your device, downloading provides flexibility.

Click the button below for a downloadable PDF version and voilà—your section is ready for offline exploration or printing whenever suits you best.

Understanding, creating, and using financial statements can help you make informed and strategic decisions about how to run and grow your business.

Unfortunately, financial statements inspire fear and anxiety for some entrepreneurs.

Entrepreneurs typically have many skills, but finance and bookkeeping are not always among them. Most lenders, however, will want to see financial statements before making a loan. And basic financial statements are not just a hurdle to jump over to get a loan. They are tools to help you understand your business.

While you don’t need to become an accountant, increasing your comfort and understanding of basic financial statements can be very helpful. Below we explain the three most important financial statements:

Profit and Loss
Balance Sheet
Cash Flow

Taken together, these three interrelated financial statements can give you powerful insights into your business’ profitability, its financial condition, and expected cash flow. Let’s take a high-level look at each one.

Craft3 meets customers where they are

When a creative and talented chef contacted us about a loan to turn his side business into a fulltime venture, he has a solid business plan and delicious products. But up to this point he hadn’t done any formal bookkeeping.

We looked at his Square receipts and put together some financial projections before issuing a $45,000 loan. We’re often able to work with entrepreneurs who have strong businesses, but incomplete financials or unconventional bookkeeping.

1. Profit and Loss (also known as an Income Statement)

Generally created monthly, after bank reconciliation, a profit and loss statement lets you track revenue, monitor expenses, and know whether your business is profitable.

You can think of a profit and loss statement as two simple formulas.

Revenue - Cost of goods sold = Gross profit

Gross profit - Expenses = Net profit

Revenue can come from goods sold or services provided. Your cost of goods sold are your costs directly related to the product or service you sell. Your expenses are other, indirect costs not associated with goods sold or services provided, such as rent.

Your gross profit shows you the money available to pay operating expenses such as rent and payroll.

Your net profit shows you money available to reinvest in your business, pay taxes, or pay yourself.

VIDEO RESOURCE

Understanding and Using Financial Statements

Astrid Daniela Galvez, is owner of ASNBS, a QuickBooks ProAdvisor and Tax Specialist, and a trusted Craft3 partner. In this video, Astrid walks through the different types of financial statements and how to best utilize them to assess your financial health. Find out where your business is making a profit and identify areas for improvement.

Watch the video and check out this guide from Intuit QuickBooks on Financial statements: What business owners should know.

2. Balance Sheet

A balance sheet is a moment in time snapshot of your business’ finances. Generally created quarterly, it lists your assets and liabilities.

You can think of a balance sheet as a simple formula.

Current assets + fixed assets - liabilities = net value or equity

Current assets include accounts receivable, inventory, and cash, while fixed assets are less liquid and include furniture, equipment, and property.

Liabilities are often broken down into those due within 12 months and longer-term liabilities such as loans and mortgages.

3. Cash Flow

A cash flow statement is future-oriented and models the expected cash flowing in and out of the business. This can help you set sales and expense goals, plan for major expenses, and cope with seasonal fluctuations in sales.

Again, there’s a simple formula.

Cash receipts (inflows) - cash disbursements (outflows) = cash surplus or shortfall

Cash receipts typically come from goods sold or services provided, while cash disbursements are your expenses.

Cash flow statements, by highlighting potential shortfalls as well as inflows, can help you determine your need for financing as well as your ability to repay a loan.

We hope this quick overview has helped you see the value of basic financial statements above and beyond the fact that they’re usually required when you apply for a loan. You can find many useful templates to get started creating basic financial statements for your business on SCORE’s Financial Statements Template Library.

DOWNLOADABLE RESOURCE

Understanding and Using Financial Statements for Your Business

Whatever a loan enables should improve your business and increase your profits.

A loan might help you increase productivity, lower your costs, or grow your sales. If it doesn’t do one of those things, then debt likely isn’t the answer — at least not right now.

For example, if you’re thinking of using a loan to bail yourself out of a difficult situation, that’s a red flag. As is not having a clear sense of how a loan will enable your business to succeed.

Do you have a simple and persuasive explanation for how a loan will improve your business?

Yes. Congratulations! This is an all-important step in getting ready to apply for a loan.
No. We recommend you don’t apply for a loan right now and instead work on your business plan and determine how a loan fits into that plan.

How much can you afford to borrow?

The industry standard measure of this is your debt-service coverage ratio (DSCR). You can calculate your DSCR by dividing your cash flow (the net profit, plus any interest, depreciation, or amortization expenses) by your debt payments.

Don’t worry if you don’t have exact figures. Play around with the DSCR calculator at right to get a rough idea of how large a loan you can afford.

	Cash flow
Calculate your DSCR
	Total debt payments

Your DSCR can tell you how much debt your business can afford.

Let’s say you need a $15,000 automatic pasta machine to really take your lasagna business to the next level. A quick DSCR calculation, however, shows you can only afford a $10,000 loan.

In this case, presuming you have no way to cover the $5,000 shortfall, taking out a loan that only covers 2/3rds of the project cost is likely a bad idea.

Banks and credit unions will typically look at previous performance to see if that history will let you service the debt you’re considering taking on. They often require a DSCR of 1.25 or greater.

If you determine that your business would benefit from a loan and you’re ready to start reaching out to commercial lenders, it pays to be prepared to talk about your business.

Typically, you’ll talk to a commercial lender before submitting a full loan application. The lender will want to learn more about you, your business, and your financing needs.

Depending on what they learn, they may invite you to work with them and submit a full application. Or they may let you know why they don’t think you’re ready to apply quite yet.

If you are working with Craft3, whenever possible, we’ll connect you with resources so you can get loan ready or otherwise progress on your business journey.

Talking to a commercial lender is an opportunity to make a positive impression. To help you prepare for this important conversation, the table below lists questions you can expect, tells you what a lender will be listening for, and includes space for your answer and notes.

We suggest you read through the questions and then add your answers; if you don’t yet have a ready answer, jot down some notes and questions to help you arrive at an answer. You can also download the worksheet.

Questions About You and Your Business

	What a lender is listening for
What is your business?	a strong business idea with potential customers how long your business has existed the ownership structure of the business
How does your business make money?	what you sell (goods or services) what you need to be profitable
What sort of entrepreneurial and/or business management experience do you have?	experience and temperament that show you succeed past accomplishments that will help you in this venture

Questions About Your Financing Needs and Situation

	What a lender is listening for
What do you need a loan for?	what you will use the money for how this will improve your business
How much cash did you, or are you able to, put into your business and this project?	commitment to and confidence in your business your ability to withstand downturns or other unexpected expenses and events that often happen
How will you repay this loan?	a clear path to success for your business historical profitability or projections that let you repay the loan available collateral (home or other assets) to help mitigate the risks of default

Keep in mind that a conversation with a lender is not a job interview or an interrogation. A lender will want to learn the basics of your business and how a loan will help you succeed, but if you don’t know how to answer every question that’s OK. In that case, a good response can be, “I don’t know, let me think about that and get back to you.”

DOWNLOADABLE RESOURCE

Prepare to Discuss Your Business with a Commercial Lender

To help you prepare for the important conversation with a lender, this worksheet lists questions you can expect, tells you what a lender will be listening for, and includes space for your answer and notes.

We suggest you read through the questions and then add your answers; if you don’t yet have a ready answer, jot down some notes and questions to help you arrive at an answer.

Click the button below for a downloadable PDF version and voilà—your section is ready for offline exploration or printing whenever suits you best.

CRAFT3 PRO TIP

Use your cell phone to record yourself answering questions

This will help you gauge how comfortable and fluid you are. You might want to do a few takes before listening to your answer.
Listen for parts that are strong as well as areas that might need more practice.
How long are your answers? Around a minute can be a good approximate target. Much longer and you may be drifting or repeating yourself. Much shorter and you may not be providing the detail and specificity a lender will be looking for.

-Megan Hulsey VP, Business Lender

Understanding your audience is helpful regardless of the situation.

If you’re considering applying for a loan, insights into how a lender thinks can give you an advantage.

While lenders are not all the same, here are a few common concerns:

Lenders want to be repaid
This may border on the obvious, but it’s worth keeping in mind. A lender will want to see a clear path to repayment and to understand the assumptions this depends on. Typically, loans are repaid out of a business’ profits. As with a home mortgage or a car loan, a business lender will want to see an adequate margin so that if things don't go exactly to plan, there is still a path to repayment.

Lenders are interested in how invested you are in your business
How has your business been financed so far? Have you put cash or other equity into your business? When applying for a loan, are you willing to pledge personal assets?

Lenders want to understand how your experiences, skills and temperament will help you succeed
What have you done previously? What skills have you gained and what obstacles have you overcome? They will want to see that you are persistent and resilient. A lender will also want to know about your capacity and experience in running a business. Can you manage people, cash flows, and systems? If needed, how do you plan to learn new skills?

Lenders want to understand credit challenges in context
Credit challenges can make it harder or even impossible for an entrepreneur to qualify for a loan. At Craft3 we don’t assume poor credit is a sign of poor character. We know it’s often the result of circumstances beyond a business owner’s control and not the result of poor choices. A lender will, however, want to understand the context behind credit challenges. Is there a good explanation? Is there a lack of credit history?

DOWNLOADABLE RESOURCE

Thinking Like a Lender: Insights for Your Loan Application

The final step in getting loan ready is often gathering the supporting documents a lender will ask for.

Here’s what Craft3 requires:

Signed application (NOTE: you can apply with an Individual Taxpayer Identification Number (ITIN))
Two years of business and personal tax returns
Personal Financial Statements from anyone who owns 20% or more of the business
Two years of financial statements (profit and loss and balance sheet) plus year-to-date financial statements

If your business is new (less than 24 months old), we also ask for:

Projections for the next 24 months
- NOTE: If your business is established and has a historic ability to service the debt you are requesting, we typically don’t require projections
Business Plan

Gathering these documents and statements will take time
Very likely more time than you imagined. We suggest you start before you apply and break the task down into parts so you’re not scrambling or spending a late night pulling everything together. Plus, it will serve you well to have this information readily available. Know that we are focused on simplifying the application process as we can and we aim to minimize the work required for you.

DOWNLOADABLE RESOURCE

Simplify Your Loan Application Process with these Document Tips

This resource is focused on what it takes to get ready to apply for a loan.

We hope the information, tips, links, and worksheets we’ve shared have helped you learn more about the loan application process and provided manageable steps for you to follow.

Now we suggest you take a step back and consider where you are. The graphic below shows the getting loan ready journey as a timeline. In practice, it’s often full of twists and turns, and the order of the steps can vary depending on your business and your situation.

As you consider the milestones and setbacks, ask yourself:

What steps have you completed?
What work remains?
What potential setbacks are you worried about?

DOWNLOADABLE RESOURCE

Get Ready to Apply for a Loan: Consider Your Next Steps

We hope this business journey worksheet helps you think about your next steps and anticipate potential setbacks. It’s important to remember that the business journey is typically full of twists and turns and that you’ll likely be working towards several milestones at once.

Click the button below for a downloadable PDF version and voilà—your section is ready for offline exploration or printing whenever suits you best.

Much like launching a business, getting loan ready is a journey.

It takes time. You may experience setbacks. We urge you to stick with it!

To help you plan your next steps, you might consider your answers to the questions we asked you in the previous section.

What do you see as the two most important next steps for you in getting loan ready?

The two steps that you identified above can help you focus your efforts. In our experience, entrepreneurs are more likely to succeed when they:

break large tasks down into more manageable steps
have a plan
revisit their plan every few months