Nobody wants to do unnecessary paperwork. Paperwork that can save your business thousands of dollars on small business loans? That might not be “necessary,” but it’s certainly worth your while.
It sounds backwards, I know. One of the many advantages online alternative business lenders have over banks is that you don’t have to provide as much paperwork. And because we’re online, it’s usually easier to submit the paperwork that is needed. That’s why it’s not uncommon for online alternative business lenders to get you your money in 24-48 hours.
But I’m going to keep on that “needed” and “necessary” part. You don’t need to provide a lot of paperwork for most alternative online business lenders. A few months of credit card processing records for a merchant cash advance or half a year’s business checking statements for an unsecured business loan – that can be the bulk of it.
However, the more paperwork you can provide about yourself and your business, the better a business lender can gauge their risk in lending your business money. The more lenders know about you, the better they can assess their risk and make the terms more reflective of the risk you actually represent. Being able to show cash flow, financial stability, using documentation to increase a lender’s confidence all result in more cash on better terms for you.
Lenders have four main levers to use to manage their risk: amount loaned, interest rate, repayment term, and other available fees, like amounts of origination or late fees. The less a lender knows about you, the more they’ll shift their risk into tougher terms on the small business loan they offer you.
WHICH PAPERWORK MAKES A DIFFERENCE
So what kind of paperwork is going to help you bring down the cost on your business loan?
Personal and business credit reports: Every lender is going to pull your credit report. Since you’re seeking a business loan, make sure you have a business credit report lenders can see, as well as your personal one. If your business doesn’t yet have its own credit report, get one started. Do that by getting a federal employer identification number (FEIN). Make sure your business has its own, separate business account. Get a business credit card that you pay off on time every month. Have your vendors report your timely payments to them to business credit reporting agencies.
Financial statements: They should be both recent and as a far back as you can share. If your financial statements show strong cash flow for the last six months, that’s great. If you can provide financial statements showing strong cash flow for the past 18 months – even better. A good, consistent cash flow gives lenders an idea of what kind of monthly payments your business can be relied on to make. They also give insight into your business’s overall financial stability. What your reserves look like, how often you did into them, and how quickly you replenish them.
Tax returns: These can be both your business and personal tax returns, which show financial stability.
Credit card processing records: Your credit card statements have value if you’re looking for a merchant cash advance (MCA). In this case, the lender isn’t concerned by your credit reports, as an MCA’s terms reflect the risk your creditors present, not you or your business. In this case, the same principle that applies to financial statements applies here. You definitely need to show your most current batch of credit card processing records, but that farther back you can go – the more confidence you can build. The more documentation you can provide, you can keep your factor rate down, which sets the amount you’ll pay to get your cash advance. This is especially true if your business is cyclical. If you’re looking for an MCA during your low period, make sure you give the lender enough documentation to show them how much in credit card sales you process during your high period.
Legal documents that show commitment to your business’s future: These kinds of documents can be the lease on your commercial space, ongoing licensing and registration for your business and/ or key personnel. Backwards looking documentation of this kind is helpful, but to increase a lender’s confidence in your business’s future, you want to show the confidence you have in it. You can also include long-term contracts with vendors, clients, or other third parties. These contracts tell lenders that others already working with you have confidence in your future as well.
Business plan and/or resume: This type of paperwork can show your business acumen. A business plan in particular, should show detailed, realistic explanation and forecast on how the money you’ll borrow will be used to generate a return. Your resume can show your past business successes, whether in this business or other ones.
Documentation on security: You may prefer getting an unsecured business loan, but if you collateral you can use as security, you’ll get better terms. You don’t have to put up business critical equipment or property to secure a business loan. You can secure a business loan with your accounts receivable; include the business credit reports, past payment history, and current outstanding invoices of your main clients. You can also secure a business loan with your inventory. You’ll have to provide documentation on volume, value, and ownership of your inventory.
SOME EFFORT ON THE FRONT-END CAN SAVE YOU BIG MONEY ON THE BACK-END
Getting your paperwork ducks in a row can make sure you’re approved for the full amount your business needs – without having to pay a premium to get it. That’s an upfront investment, whether it’s your time or paying your accountant, that will pay dividends in the future.
If you’re not organized enough right now to get a broad and deep collection of paperwork together, consider this an opportunity. Get it all organized once, and it’s much easier to maintain. Now you’re set up to save money on business loans whenever you might need one.