5 Ways to Prep Your Business and Personal Finances Before You Apply for a Loan

The decision to secure funding for your business shouldn’t be taken lightly, but it can be a great way to grow and expand in new ways. Be prepared that as soon as you submit an application, a lender will start to dig into your personal and business finances. Sure, it can feel a little invasive—and the wait can be excruciating — but if you’ve done your legwork, the process will go much more smoothly.

It’s a good idea to take action a few months before submitting a loan application so you can ensure lenders will find clean, orderly finances that show you’re a safe bet for investment. Here are five simple steps you can take to tidy up your finances and ease the stress once lenders start to review your business for a potential business loan.

1. Lower your “utilization rate”

Your utilization rate is a number that represents the amount of credit you are currently using, divided by the amount of credit you have available. Generally, lenders like to see a 30% utilization rate or lower when approving a new credit line. Remember:  the total credit you have available is just as important as the total amount of that credit you are currently using.

Say you have $10,000 in total available credit, and you currently owe $5,000—your utilization rate is 50%. To get your rate at or below 30%, you can either pay down debt or increase the amount of total credit you have available, lowering your overall ratio. If you don’t have the funds to make a big payment, opening a new credit card is one way to quickly increase your overall available credit and lower your utilization rate.

2. Check (and re-check) your credit report

As a business owner, there’s a lot on your plate, and it’s easy to put some tasks on the backburner. Say you have a medical bill that was left unpaid because it was sent to the wrong address. Unpaid debt and accounts in default can potentially crush your credit score and make it difficult to get approved for a loan.  

Doing a thorough check of your finances, both personal and business, is key. You want the lender to know you’re on top of all your payments, both big and small. If you find an unpaid bill, don’t panic. Pay it as soon as possible, then take steps to fix any damage it may have caused.

3. Pay attention to your business bank statements

Most new business owners probably know the feeling of working hard to make ends meet, and some months are bound to be better than others. Negative bank account balances and non-sufficient funds are a very real struggle for some small business owners, especially those who are just getting started.

When applying for a loan, try your best to make sure your bank statements show a positive balance at the end of every month. If you fall into the red one month, give yourself a three to four month window before you pursue a loan. If you’re in a position where you’re worried you may overdraw, setting low balance alerts may be helpful. Many banks allow you to personalize alerts to help avoid tight situation.

4. Make consistent deposits into your business accounts

Lenders like consistency and they want your business to be predictable. You can do your best to control this by making regularly scheduled deposits into your business accounts. Not only is it good for your finances, but doing so will allow lenders to better know—and predict—exactly when you’ll be able to make payments. Additionally, it allows them to anticipate the future of the business, which will help convince them that your dream is a good investment.

5. Separate your business and personal finances

It’s easy to mix your business and personal life—after all, your company is essentially your baby. But it’s key that your business is its own entity. There are seemingly endless reasons as to why this is a good idea for all business owners. Doing so keeps your personal finances safe by adding a wall of protection if you ever run into trouble, especially when tax time comes around. It’s important that there’s a clear distinction between you as a business and you as a private citizen. Separate finances can provide a clear picture of your business’s financial state, and helps you to be sure your credit is being built in the right places.

In addition to being a good business practice, separate accounts look better to your potential lenders. It shows that you’re a well-organized, dedicated business owner.  It also makes their job easier to understand how your business is doing financially. A lender will likely still look into your personal finances, but might be more forgiving if the accounts are separate.

Whether you’re considering taking out your first business loan, or your sixth—a little financial clean-up beforehand is always a good idea. Doing so will make the process a little easier and avoid any unpleasant surprises along the way.

Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.