Running a small business comes with its challenges, and securing funding is often a significant hurdle. Financial preparation is crucial, given the high rates of small business failure associated with funding issues.
Financial experts recommend that small business owners have seven essential financial documents in place to increase their chances of securing funding, especially when applying for a small business credit card, grant, or loan.
1. Business Credit Score
Understanding and managing your business credit score is vital for securing funding. Establishing a credit profile with business credit bureaus like Experian, Equifax, and Dun & Bradstreet is key. Obtaining a DUNS number from Dun & Bradstreet is necessary for federal grants.
2. Profit and Loss Statement
A profit and loss statement, also known as an income statement, summarizes your business's income and expenses over a specific period. This document is crucial for investors, lenders, and suppliers to assess your business's profitability.
3. Balance Sheet
A balance sheet provides a snapshot of your business's assets, liabilities, and equity at a specific point in time. It helps stakeholders evaluate your company's financial health and solvency status.
4. Bank Statements
Stakeholders often review bank statements to assess cash flow patterns, account balances, and repayment ability. Regularly reviewing and reconciling bank statements is essential for accuracy.
5. Income Tax Returns
Income tax returns play a critical role in verifying your business income, financial stability, and compliance with regulations. Maintaining accurate tax records is crucial for funding applications.
6. Insurance
Insurance protects your business and personal assets from various risks and signals compliance and protection to stakeholders. Types of insurance include general liability, professional liability, business owner's policy, and product liability insurance.
7. Financial Forecasts
Financial forecasts project future revenue, expenses, and profits, providing insights into your business's trajectory. Stakeholders rely on this information to assess growth potential, repayment ability, and financial stability.
By ensuring these financial documents are in order, small business owners can enhance their chances of securing funding and attracting investors.
