Getting Your Business Ready for Financing
A Proactive Guide
When you need financing for your small or medium-sized business, the last thing you want is to scramble at the eleventh hour. Whether you’re pursuing a new loan or refinancing existing debt, preparation separates smooth closings from delayed deals—or worse, declined applications. The businesses that secure the best terms are the ones that treated loan preparation as a strategic initiative, not a last-minute checklist.
Let me walk you through the essential steps to position your business for financing success.
Understanding Bank Underwriting: See Your Business Through a Lender’s Eyes
Bank underwriters are professional skeptics. Their job is to find reasons why a loan might fail, not reasons why it will succeed. Understanding this mindset is your first step toward preparation.
Underwriters evaluate three core elements: your ability to repay the loan (cash flow), your collateral (assets that secure the loan), and your character (track record and compliance history). They’ll scrutinize your financials with a level of detail that might surprise you, looking for inconsistencies, unexplained variances, and red flags that suggest risk.
The benefit of knowing this upfront? You can address problems before the underwriter discovers them. Every issue you resolve proactively is one less negotiating point, one less condition to satisfy, and one less reason for the bank to reduce your loan amount or increase your rate.
Getting Your Financials in Order
Your financial statements are the foundation of any loan application. Banks typically require at least three years of business tax returns, year-to-date profit and loss statements, and current balance sheets. For many lenders, you’ll also need personal financial statements and personal tax returns from all business owners with 20% or more ownership.
Start by ensuring your financial statements are prepared or reviewed by a qualified accountant. While not always required, having CPA-prepared statements significantly enhances credibility. If your business has been operating on cash accounting, consider whether accrual-basis statements would present a more accurate picture of your financial health—many banks prefer accrual accounting for businesses with inventory or significant receivables.
Pay special attention to reconciliation. Your business tax returns should align with your financial statements. Unexplained discrepancies will trigger questions and slow your process. If there are legitimate reasons for differences—such as book-to-tax adjustments—document them clearly with your accountant’s explanation.
Review your debt service coverage ratio, which measures your ability to cover loan payments from operating income. Most banks want to see a ratio of at least 1.25:1, meaning your cash flow exceeds debt payments by 25% or more. If you’re falling short, you have time to improve profitability or reduce discretionary expenses before applying.
Don’t overlook personal finances either. Banks will pull personal credit reports for all guarantors. Check your credit now and address any errors. If your personal balance sheet includes assets like real estate or investment accounts, gather current statements showing values. The stronger your personal financial position, the more confidence you inspire.
Solidifying Your Collateral Base
Collateral gives banks a secondary repayment source if your business cannot service the debt. The stronger your collateral position, the better your loan terms—and the higher the loan amount you can secure.
Begin by inventorying all potential collateral: real estate, equipment, inventory, accounts receivable, and intellectual property. For each asset category, determine its current fair market value and its potential liquidation value. Banks lend based on liquidation value, not what you paid or what you think assets are worth.
Understand typical advance rates, which vary by collateral type. For real estate, banks commonly lend up to 75-80% of appraised value. Equipment might support 50-80% depending on type and marketability. Inventory advance rates range from 50-70% for finished goods to as low as zero for work-in-progress or specialized inventory. Accounts receivable typically support 70-85% advances on current receivables under 90 days.
If you’re planning to use SBA financing, note that SBA 7(a) loans can go up to 90% loan-to-value on owner-occupied real estate and typically require collateral on all business assets. The SBA mandates that loans over $350,000 must be secured by available collateral to the extent it’s available, though lack of collateral alone won’t disqualify an otherwise strong application.
Calculate your total collateral value using conservative advance rates. If you’re short, consider whether additional collateral sources exist—such as pledging business owner’s personal real estate or liquid securities. Having this analysis done before you meet with lenders shows sophistication and gives you realistic expectations about loan sizing.
Cleaning Up Real Estate Collateral Issues
If you own the real estate where your business operates, it’s likely your most valuable collateral. Banks will order a formal appraisal, but you should understand your property’s value and condition before they do.
Start with title work. Order a preliminary title report to identify any liens, easements, or encumbrances that might affect the property’s value or the bank’s lien position. Old mechanic’s liens, unresolved judgment liens, or gaps in the chain of title can delay closings for months. Address these issues now, not when you’re under contract pressure.
Environmental concerns are increasingly important. For commercial and industrial properties, banks often require Phase I environmental assessments. If your business involves manufacturing, auto repair, dry cleaning, or gas stations, environmental issues are almost certain to arise. Consider ordering your own Phase I early—if problems exist, you’ll need time to develop a remediation plan or negotiate environmental insurance.
Deferred maintenance hurts both appraisals and lender confidence. Walk your property with a critical eye. Does the roof need replacement? Are HVAC systems functioning properly? Is the parking lot deteriorating? A property showing neglect signals management problems. Budget for necessary repairs before the appraiser’s inspection.
Verify your property’s zoning and conforming use status. If your business operates under a non-conforming use or grandfather clause, document this clearly. Some banks hesitate to lend against properties with use limitations, so you’ll want to address concerns early in conversations.
Addressing Non-Real Estate Collateral Problems
Equipment, inventory, and receivables each present unique challenges that require attention before underwriting begins.
For equipment, gather serial numbers, purchase dates, and original costs for all significant assets. Banks will order equipment appraisals, but you should have your own sense of fair market value. Equipment that’s fully depreciated on your books may still have substantial collateral value—or alternatively, equipment with significant book value might be worth far less than you think. Older specialized equipment, obsolete technology, or built-in fixtures typically have limited collateral value.
Ensure you have clear title to equipment. If you have existing equipment loans or leases, pull the agreements and verify what’s owned versus what’s financed. Banks need to know what they can secure a first lien against. Missing titles or documentation for vehicles and titled equipment should be resolved by ordering duplicates from the DMV or manufacturer.
Inventory collateral requires accurate counts and proper valuation. Conduct a physical inventory and reconcile it to your books. Banks discount inventory that’s obsolete, slow-moving, or specific to custom orders. If your inventory includes raw materials, work-in-progress, and finished goods, separate these categories—banks value them differently. Consider whether a perpetual inventory system would provide better tracking and credibility than periodic counts.
For accounts receivable financing, prepare an aged receivables report. Banks focus on current receivables (under 90 days) from creditworthy customers. Receivables from related parties, affiliates, or foreign customers often receive zero advance rates. Clean up your receivables by writing off uncollectible amounts and resolving disputed invoices. If concentration exists—where one or two customers represent a large percentage of receivables—be prepared to explain the relationships and creditworthiness of those customers.
Ensuring Compliance with Taxes, Licenses, and Regulations
Compliance problems are deal-killers. Banks cannot close loans when businesses have unresolved tax liabilities, expired licenses, or regulatory violations.
Start with tax compliance. Verify that all federal, state, and local tax returns are filed and current. This includes income taxes, payroll taxes, sales taxes, and property taxes. Request tax transcripts from the IRS showing your filing history and confirming no outstanding liabilities. If you have payment plans for back taxes, document these agreements and demonstrate consistent payment history.
Payroll tax issues are particularly serious. Banks view payroll tax delinquencies as evidence of severe cash flow problems—these are trust fund taxes that should never be “borrowed” from. If you’ve fallen behind on payroll taxes, resolve this before approaching lenders. The consequences are too severe to overlook.
Review all business licenses and permits. Operating licenses, professional licenses, health department permits, liquor licenses, and industry-specific certifications should all be current. Expired licenses suggest operational disorganization and may technically mean you’re operating illegally. Create a compliance calendar tracking all renewal dates to prevent lapses.
For regulated industries—healthcare, transportation, food service, childcare, financial services—verify you’re meeting all industry-specific requirements. Many banks require compliance certificates or third-party audits confirming regulatory adherence. If your industry requires bonding, insurance, or specific capital reserves, ensure you’re meeting these thresholds.
Business entity compliance matters too. Confirm your corporation or LLC is in good standing with the Secretary of State. File any overdue annual reports or franchise tax returns. Verify your registered agent information is current. These are simple administrative matters that nonetheless can delay loan closings.
The Proactive Advantage
The businesses that secure financing efficiently and on favorable terms share one characteristic: they prepare before they need the money. They treat loan preparation as a six-month project, not a two-week scramble.
This proactive approach delivers concrete benefits. You’ll negotiate from strength rather than desperation. You’ll avoid the cost and delay of fixing problems mid-underwriting. You’ll present your business as well-managed and bankable. And perhaps most importantly, you’ll sleep better knowing that when opportunity or necessity requires financing, you’re ready to move quickly.
Start preparing today, even if you don’t need financing until next year. Your future self—and your banker—will thank you.
Mike Lang provides weekly actionable guidance for small and family business owners. Have a topic you’d like covered? Reach out anytime.