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Sep 4Steve Koval

Small Business Loans

Sep 4Steve Koval

Approaching a bank for a small business loans for the first time can be an intimidating experience. Remember, the bank wants to loan you money if you qualify.  One way to improve your chances of being approved for a loan is to be prepared beforehand with the information and documentation the bank will request.

Research Options

In virtually every town or city there will be multiple financial institutions where you may apply for a loan.  Many will publish rates and other information on their website or in pamphlets that can be picked up at a branch location.  Review these sources to get an idea of the types of loans they specialize in and the rates they charge.

Pick up a printed application if available or go online and see if the process can be completed electronically.  Take notice of the information, both personal and business that is being requested. The time spent in researching options may save significant cash over the life of a loan.

TIP: Avoid the temptation to fill out applications online and submit them ‘just to see’ what the process might be and if you will be approved.  Many institutions do a ‘hard pull’ of your credit history.  Hard pulls have to be authorized by the borrower before they can be requested, but too many hard pulls can adversely affect your credit rating.

Credit Reports

Lenders will typically check both the company’s business credit report (if already in business) and the owner’s personal credit report for small business loans.  It is advisable to get a copy of your personal credit report from the three major consumer credit reporting agencies (Experian, TransUnion and Equifax) before actually submitting a formal loan application.  Federal law requires that these agencies provide you with a copy of your report annually upon request.

Request all three reports at the same time and follow their procedures to correct or clarify any information that may be incorrect or misleading. Make certain that any discrepancies are cleaned up before beginning the application process.

If your business has been operating for a period of time also check your business credit report. Scores above 650 are generally favorable.  Proven methods of improving the business credit score are paying all bills on time and opening credit cards in the company name – remembering to pay off the credit card balances completely each month.

Financial and Business Documents

Most banks require a borrower to submit two or three years of personal and business income tax returns.  Obviously, this can be very difficult for start-up enterprises so the weight placed upon the personal tax returns can be substantial. Tax returns prepared by a Certified Public Accountant (CPA) or other professional add credibility to the numbers presented.

Complete business financial statements which include, a balance sheet, income statement and statement of cash flows will be required for each of the prior three years that are available. If it has been several months since the close of the fiscal year-end, then prepare interim statements through the most recent quarter-end.  Again, statements compiled or reviewed by a CPA lend credibility to the statements presented.

TIP: Make certain that the numbers presented on the financial statements agree with those on the tax return or provide a reconciliation of the two numbers for the banker.  There are a number of reasons where numbers may differ due to the nuances of accounting principles and tax laws, so don’t make the bankers figure it out themselves.

Key legal documents, licenses, permits and contracts may be required, so have them ready if asked. These documents may include the following:

  • Articles of Incorporation (corporation) or Articles of Organization (LLC)
  • Operating Agreement (LLC) or Shareholder Agreement (corporation)
  • Fictitious Business Name (FBN) filings
  • Franchise Agreements
  • Business Licenses and Registrations
  • Copies of Major Contracts

Collateral and Guarantors

Small business loans require collateral, something pledged as security for the repayment of a loan. Common business assets used as collateral include accounts receivable, inventory, real estate or equipment.  If the property has already been pledged as collateral for another loan, such as a mortgage on a building, make certain that is disclosed.

Guarantors are individuals or organizations that guarantee to pay the loan in the event the business defaults.  The primary guarantors on business loans are generally significant owners of the business. If there are two or more guarantors, they will usually be ‘jointly and severally liable’ for the repayment of the loan.  This means that each individual guarantor is responsible for the entire loan balance. Creditors will usually pursue payment from the guarantor with the greatest ability to pay, so be careful when considering becoming a guarantor of a loan.

Use of Funds

Be clear in the application to describe the use of the proposed funds.  Purchase of appreciating or income producing assets or investment in expense cutting technologies will usually be viewed favorably.  What if the use of funds is for something riskier?

A well thought out, written business plan shows potential lenders that you have mapped out a pathway to success. The plan need not be lengthy or contain excruciating detail. However, it does need to cover at least these items:

  • Brief Executive Summary – make it no more than one page long and be certain that it covers all pertinent information.  This may be the only portion of the business plan that a loan officer will read.
  • Overview of the company and how it will make a profit.
  • Description and quantification of the target market and the competitive landscape.
  • Discussion of the company’s products and/or services and what makes them unique.
  • Explanation of how the products and/or services will be marketed, promoted and sold.
  • Experience of the management team at the company.
  • Forecasted financial information including a break even analysis, cash flow projections and pro forma balance sheets and income statements for the forecasted periods.

TIP: Have an outsider to the company review the financial projections before including them in the plan.  Too often projections past the first year are simply extensions of Excel formulas that yield nonsensical numbers the further into the future they go.  Someone outside the company should be able to identify quickly if the projections are overly optimistic.

Conclusion

Remember, the bank wants to lend you money. Provide them with a loan application package that will make them want to do so and your probability of success increases significantly. As Partners with B2B CFO®, we have all developed strong relationships with the local banks in our respective areas. Please contact us if you require assistance to increase the likelihood of success in applying for your next business loan.

photo credit: Blue Piggy Bank With Coins – Retirement via photopin (license)

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