If you’re an emerging business owner in the Vancouver or Longview area, one of the questions you may be asking is how to get a business loan from a bank. We’re here to help!
In today’s blog post, we’ll guide you through getting a bank loan for your business. We’ll also take a look at other common financial questions we hear from Washington business owners, including selecting your business entity and planning for state and local taxes.
Let’s dive in!
How Do I Get A Bank Loan for My Business?
Most small businesses need to take out a bank loan at one point or another– whether to invest in real estate, increase your inventory, or simply keep things running. Though small business loan approval rates have been growing, getting a loan is still not as easy as you would hope.
It’s important to understand how to maximize your chances of approval for the loan you need. Here are some steps to do just that.
DETERMINE ON YOU’LL USE THE MONEY
This may sound obvious, but knowing exactly how much money you need is important. Detailing what the funds will be used for will help determine how much is needed.
If you underestimate the amount you need, you’ll likely find yourself scrambling for another loan not too far down the road. While overestimating your needs can cause banks to question your credibility.
How you plan to spend the money has an impact on approval of your loan. Your lender will want to know whether the funds will help your business gain the necessary revenue to pay back the loan (plus interest) amount.
Knowing how the money will be used will also help you identify what type of loan is best for your business. For example, the type of loan you get will vary based on whether you need quick funds to cover cash flow or working capital for long-term growth.
UNDERSTANDING THE TYPES OF BUSINESS LOANS AVAILABLE
The next step toward securing capital for your company is determining which loan option fits your business needs. There are 3 common types of small business loans available:
- Most common type of loan distributed by commercial lenders but can be difficult to obtain– especially if you’re a small businesses without a strong growth plan.
- Best for business expansion, acquisition, refinancing, or other large purposes.
- Typically repaid in monthly installments.
- Loan amount is usually below $100,000.
- Best for building up inventory, raising cash for accounts payable, working capital, or finishing a project with quick returns.
- Does not use monthly payments. Payment must be made in full at the end of an agreed-upon term.
Line of Credit
- Allows you to access funds immediately and incrementally, as needed.
- Usually includes high compounded interest and fees.
- Best for temporary shortfalls in income.
Once you know what kind of loan you need and how much money you want to borrow, it’s time to research your lending options. You should visit several banks to learn more. We suggest looking at both commercial banks and regionally focused institutions.
GATHER FINANCIAL AND LEGAL DOCUMENTS
The last step before completing a loan application is to compile and understand all the financial and legal information you’ll need. Take a look at the requirements specified by your lender. These typically include the following:
- Credit score
- Debt to income
- Industry risk report
- Business plan (including your business owner resume)
- Financial results and projects.
- Personal financial information, including the last 3 years of tax returns
If you have questions about compiling all this information, talk with a trusted certified public accountant. At Opsahl Dawson, we can help prepare your financial statements to provide your lender with the assurance they need. Give yourself the best chance of getting a loan by providing your lender with complete and accurate financial documents.
Remember, not every business loan is approved. Even if you’re denied on the first loan, don’t get frustrated. Instead, reconsider what type of loan or funding may be a better fit for your business and keep trying!
What Kind of Business Entity Should I Form?
Of all the decisions you make when starting a business, choosing your company’s legal structure is one of the most important. This decision has huge tax implications and will affect the future financial decisions of your business.
Naturally, many Washington business owners question which structure they should choose. We always recommend working with a trusted accountant to help you pick the right entity for your business. In the meantime, here’s a review of the types of entities your business can choose from.
- Sole Proprietor – The simplest business form you can operate under. A sole proprietorship is not a legal entity. It’s a business that has no separate existence from its owner. Both income and losses are taxed on the owner’s personal income tax return.
- Partnership – A business with 2 or more people who share in the profits and losses of the business. Each partner is personally liable for all financial business obligations.
- Corporation (S or C) – A business that is separate from those who founded it. The corporation can make a profit, is held legally liable for its actions, and requires extensive record-keeping. A Subchapter (S) corporation allows income or losses to be passed to individual tax returns.
- Limited Liability Company (LLC) – A business similar to both a corporation and a partnership. Profits and losses can be passed to owners without taxation of the business. It also shields owners from personal liability.
What Books and Records Should I Keep for My Business?
The type business you are in affects the type of records you need to keep. However, all businesses must have an organized record of their business transactions. This includes things like your gross income, deductions, and credits.
Beyond just a list of transactions, you should also keep important supporting documents, including sales slips, paid bills, invoices, receipts, and so on. These documents support the information in your books and should be kept in an organized and safe place.
Ensure your record keeping is organized and up to standard by partnering with an experienced accounting firm.
What Taxes Do I Need to Plan For?
The taxes you pay and how you pay them are dependent on the type of business you operate.
It’s important for all Washington state business owners to understand their tax requirements at both a federal and state level.
The three general types of federal business taxes include:
- Income Tax – A tax based on how much income your business generates in a year.
- Self-Employment Tax – Social security and medicaid tax for people who work for themselves.
- Employment Taxes – Business with employees have certain tax responsibilities and forms to file.
Learn more about these taxes at IRS.gov.
Washington state small business taxes will also apply. Depending on your type of business, these may include:
- Excise Tax – Businesses meeting certain state requirements (such as manufacturing or selling certain products) must pay this tax.
- Business and Occupation (B&O) tax – A gross receipts tax levied on gross income, rather than net income.
- Sales Tax – A consumption tax on the sale of goods and services. This tax is conventionally levied at the point of sale.
- Use Tax – A tax on the use of Washington goods or services when sales tax has not been paid.
- Real and Personal Property Taxes – A tax charged on immovable property, such as a house, building, or land.
- Other industry-specific taxes
Get Answers to All Your Financial Questions
Working with a CPA firm can help alleviate the stress of managing the important financial aspects of your small business.
At Opsahl Dawson, we want to help your business succeed. Our team has over 30 years of accounting experience and we are committed to providing you with the best tax and accounting services in the Vancouver area.
Whether you need help compiling financial records, planning and preparing taxes, selecting a business entity, or managing your small businesses bookkeeping, we can help!
Give us a call today at (360) 737-8007 or contact us online.