The decision has been made. You have decided that XYZ bank is the bank-of-choice to lend your company some badly needed capital. Now is the time to pay that banker a visit, right? Wrong.
Once you sit down with a business banker, you will need to answer a variety of questions about your financial needs and business goals. If you do a little homework before hand, answering those questions thoroughly may ensure a smoother, and possibly quicker, loan application process. Below are a few of the questions that most commercial lenders will want answered before your loan application can proceed.
What is your company’s experience in its particular industry and market?
Do you have a well-designed business plan that includes a market definition, vision, company goals, and financial projections?
What resources are available to support reasonable equity investment, and/or what’s your willingness to pledge personal assets to support collateral?
Business bankers also will need to review federal tax returns, monthly or quarterly financial reports, and year-end balance sheets and income statements for the last three years (or since the business started, if less than three years old).
Why is it necessary to provide all this paperwork to receive a business loan? The answer is simple. Most financial institutions are relationship lenders. The business relationship you create with a commercial lender is based on experience, financial strength, and integrity. Your lender must be assured that the cash flow generated by your business will be sufficient to make the loan payments into the future. The more complete your loan documents are, the better the chances of getting a loan approval.
Once your planning is complete, and you’ve gathered the supporting documents you need, it is time to discuss your financial needs with a commercial loan officer. Many times the first step is completing a loan application; other banks may use the business financial statements as an “application.” This application provides the banker with critical information, including the history of the business, names of owners, legal structure of the business, pledged collateral, and the purpose of the loan.
Once the application is completed, your lender will want to discuss a variety of topics including your short and long-term business goals. For instance, why do you want credit vs. internal financing? Will you be purchasing equipment? Paying off vendors? Buying real estate? Is your company’s cash flow needs primarily seasonal? Do you have long-term expansion plans? Will the loan require an SBA guarantee?
The answers to these questions will dictate the type of loan needed, and the terms under which that loan will operate.
Next, your banker will probably discuss details of the loan and the performance the bank expects of your company in order to satisfy the financing requirements. Many loans require a personal guarantee, which means you will need to provide personal financial information. A personal guarantee is an unsecured written promise from a business owner and/or business executive guaranteeing payment on a commercial loan in the event the business does not pay. Since it is unsecured, a personal guarantee is not tied to a specific asset. However, in the event of non-payment a lender can go after the guarantor’s personal assets. This obligates the borrower to pay for the business loan in case the company itself cannot support the payment.
Once all of the necessary paperwork is completed, and the terms, amount, and expectations of the loan are agreed upon, the loan will be submitted for approval.
Improving the odds
In order to improve the odds of having your loan request approved, be aware of these four common reasons why business loans are denied.
1. Problems with past business or personal credit
2. Lack of equity in the business
3. Lack of planning (cash flow, marketing, legal)
4. Lack of collateral
5. Sloppy application with obvious errors
6. Unrealistic assumptions
7. Tax liens and/or judgments filed against the company
8. Recent bankruptcy, either personal or business
Some industries naturally have a higher-than-average probability of failure, but each bank’s experience by industry may vary. If you are concerned about your own industry’s performance, and fear it may affect your application, talk to your lender. Ask how much experience the lender has in your industry and whether or not it has been positive.
Working together as a team with a commercial lender will place the business owner in a better position to make sound business decisions, and build a better foundation from which to reach their financial goals.
Posted at 12:15 PM