What a lender looks at before approving a small business loan

Most owners find out what a lender wants the week they need the money. The equipment broke, a second location came up, or a slow season ran longer than planned. Then the bank sends a list, and half of it doesn't exist yet.

You can get ahead of it. Lenders check the same handful of things every time, because they're all answering one question: if we lend this business money, will it pay us back?

The first thing they ask for is three years of profit and loss statements and three years of tax returns. They lay them side by side. If the P&L says you made $180,000 and the tax return says $95,000, that gap is the whole conversation. Sometimes there's a good reason, like depreciation or owner expenses run through the business. The lender just needs the numbers to line up and an owner who can explain the difference in a sentence.

Next is cash flow against debt. What the business earns has to cover the payments it already owes, with room left over. If you're carrying a truck loan, an equipment lease, and a line of credit, they add those payments up and compare them to what's left after expenses. If it's tight, the new loan makes it tighter, and they know it.

They also look at what kind of debt it is. Merchant cash advances and cards covering payroll tell them the business has been plugging holes with expensive money. That doesn't always mean no, but it changes the terms.

Then they check that the business is really a business. Is it its own LLC or corporation? Is the bank account in the business's name? Are sales tax and payroll taxes filed and current? An open IRS notice or unpaid sales tax can stop a loan by itself, because the government gets paid before the bank does.

Last, they look at you. Your personal credit, how you pay yourself, and whether you understand your own numbers. An owner who knows last month's profit and can explain why margins moved is a better bet than one who says the bookkeeper handles all that.

None of this is hard to fix if you start before you need the money. Get your books current through last month. Build a P&L for each of the last three years and make sure it matches your returns. List every debt payment in one place. Clear anything overdue with the IRS or the state. Put the accounts and licenses in the business's name.

Do those five things and the next time a lender sends the list, you'll already have it.