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Business Loans are Personal

How Business Loans are Surprisingly Personal

By Civic Federal Credit Union
3 min read
January 20, 2022
How Business Loans are Surprisingly Personal

The only constant is change. No one knows that more than small business owners. Any increase or decrease in revenue or customers can shift the balance of your operating budget and require some help in the form of a business loan. But, does the business loan process only focus on your business? The answer is a big no.

You are your business

And your business is you. Given this relationship, there are many common misunderstandings about what information is needed for a business loan. Namely, why personal financial information is requested during a business loan application process.

The reason is that most of time there is personal responsibility for a business loan - a personal guarantor(s) for the funds. This personal financial information is actually part of the business loan ratio. Loan officers need to know your complete financial story, one that includes income and total debt for your business and personal situation to make an informed decision.

Personal debt matters

Many small business owners view business debt and personal debt as separate. In the eyes of a loan officer who is trying to help you, it all matters. They need to know about business and personal loans, auto loans and any other outstanding debt. This is referred to as debt service coverage. During the business loan process, there are certain ratios that will be applied to your information. So be mindful of your total debt. It will matter if and when you ever need to apply for a business loan.

Longevity in business

A brief business history helps the loan officer understand your business trends, revenue growth, expansion costs and any one-time costs that may help explain a high expense, for example. Credit unions work hard to help newer small businesses establish checking and savings accounts, but most will require two years of business history to be considered for any business loans. As part of the application process, year-to-date financials will also be required.

Take control of your complete financial story

Many loan experts say that your financial story is written on the pages of your profit and loss statement and balance sheet report. To successfully get a business loan, you must show not just tell your story.

Write your own financial story now before you ever need a business loan. Here are ways to take control of your business and personal finances that will help you in any future business loan review.

  • Remember that business loans are different than personal, but require financials from both. You must be able to show personal income. Many business owners do not take a salary from their businesses, which can be challenging when applying for a business loan. Also, be aware of your total debt (business and personal) and focus on building your personal credit score. Both will be looked at during the business loan process.
  • Understand that while your funding need may be immediate, business loans can take days, not hours. At Civic, loan officers work efficiently as possible, but need time to gather and review the financial information provided. Your ability to provide the needed financial information in an organized and time-sensitive way will help to speed up the application process. While your funding need may be immediate, no loan decision can be made without a complete review of all financials.
  • Be mindful that business loans do not protect you personally. Part of the business loan ratio is the personal guarantor. That means you are personally responsible for the repayment of the business loan should your business go out of business.
  • Plan to manage your business with accounting software. This will help maintain accurate and up-to-date financials, speed up the loan application process, and make it easier for you. Many small business owners do not use QuickBooks or Quicken or other software to keep accurate financial records. This is a mistake. Get accounting software or hire a local bookkeeping professional. Most accounting software can recommend local resources to you, too.
  • Work with a business accountant to insure your financial story is accurate. It is common for loan officers to see self-prepared business tax returns that are missing information or have errors. The most effective way to get all of the tax benefits of owning a business is to hire an accountant who specializes in serving small businesses. That way, you will have accurate business and tax information to share with any loan officer, when needed.
  • Get a business credit card to manage business expenses, not to build business credit. Putting all of your business expenses on a business credit card allows you to easily keep track of them and integrate into your accounting software from your bank. Unlike personal credit, there is no need to build business credit.

You are your business in many ways. Especially when it comes to applying for a business loan. It is important to know how your personal and business finances impact your entire financial story. Learning about your finances and taking control now can help you down the road with any future small business loan needs.

Disclaimer: You + Money blog posts are provided for informational purposes only and are not intended to replace the advice of a financial, legal or accounting advisor.

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