Obtaining a business loan has become more difficult as the economy, regulations, and lendig policies become more stringent. I took the following notes during a recent staff training presentation and hope they will help you to understadn what lenders need to see in a business loan appllication.
I. Understanding the Lender
It is much easier to find a business lender if you understand what a lender needs in order to process your loan application. I recommend starting with the lender you are already doing business with but check for the most recent bank policies and procedures. Government regulation and bank policies are frequently updated. To prepare you application it is helpful if you know the following:
Bank Policies –
Loan portfolio mix, number of and type of loans they like to make.
Loan Programs they use? (SBA or USDA programs?)
Loan requirements – Minimum Credit score, Loan to Value, Collateral, Equity, Lending Ratios -- Liquidity, Debt Coverage, others
Risk tolerance – some banks are more liberal, others more conservative.
Lender’s experience with customers in your industry?
Recent changes in the bank’s corporate structure that effect lending policies.
Banking regulations that affect the bank’s lending policies.
Average time to close a loan.
• Loan Underwriting – The lender will only know what you provide, incomplete applications get denied. Your loan officer will need to justify a loan approval based on due diligence review of you and your business. Information they are looking for includes:
Is the loan purpose consistent with the type of loan?
Credit Standing (score and credit report)
Cash Flow, is the business be profitable?
.... Are losses explained?
.... How were losses funded?
.... Quality and value
.... Collateral value covers loan?
.... Has equity increased or decrease over last three years?
.... Amount of contributed equity and earned equity (retained earnings)
.... Exceed lenders minimum target?
.... Ratio trends over last three years
Business condition – Strengths, Weaknesses, Issues
.... Other business owned
.... Other sources of income
.... Personal Financial history
II. Preparing a loan package
Presenting the lender with a complete package is critical. Your package must demonstrate your capacity to manage the business, your capacity to produce stated outcomes, and the market place capacity to buy your service/product. Incomplete packages slow review and errors or misstated information will result in a denied application. Lenders will be examining:
1. Financial Statements – History
• Profit Loss Statements- YTD Revenue, margins, profit
• Cash Flow: EBITDA and Working Capital needs, Owner draws, distributions, When you spent cash, when you received cash
• Last three years of Tax records, Explain differences between tax records and Profit & Loss Statements. Explain any expenses made for tax purposes
• Balance Sheets – current liquidity, asset quality, leverage, capital structure, retained earnings, Aging of A/R and A/P
• Budget Projections with assumptions
• Break Even analysis
• Ratio analysis - Liquidity, leverage, performance over time has been consistent and is sustainable Sales to Assets, ROI, ROA, A/R Turnover, Average Collection period A/P turnover, average payment period Inventory Turnover, Inventory on hand
Character of top management, resume of management experience, experience as management in this business/industry. Team depth, who does the tasks of CEO, CFO, A/R and A/P. Succession (who runs the business if you can’t be there?) Performance as compared to industry standards and trends
3. Business Plans
• Supports and explains how you will accomplish what you claim in your budget. How you meet the five C’s of credit. (Character, Capacity, Capital, Conditions, Collateral)
• Explains market opportunity
• Provides budget assumptions.
• Describe the business, how you make money
• Describe the service/product, provide pictures, marketing materials, samples
• Associated documents, Articles of Incorporation (Partnership), Leases, Contracts, firm estimates on major purchases, Collateral
III. Presentation Tips
• Be enthusiastic
• Be professional
• Be prepared
• Make an appointment, be early and ready
• Be organized and bring copies of all the document to leave with the lender
IV. Deal Breakers
Some issues in your history can be deal killers, there must be extenuating circumstances before a lender can consider proceeding with an application. Other problems could result in a loan application being considered as a higher risk. If a loan were to be approved, these issues could result in higher interest rates and more conditions and restrictions.
Preparing a quality loan application package will help identify potential deal breakers and provide you the opportunity to explain what happened and what you have done to correct the situation. Remember, it is safer for the lender to say no if there is any doubt or perception that your loan is a higher risk than the lender wants to accept.