Small businesses may find it hard to obtain a loan these days, what with banks becoming stricter with their criteria for selecting qualified applicants, that it can be disheartening for company owners who need credit for a variety of reasons: infuse their business with additional capital, or for their daily cash flow needs; grow their business; purchase equipment; or real estate. All great intentions, to be sure, but regardless of the amount needed for each undertaking, also pose considerable risk for lenders wary of not getting paid on time, if at all.
It would be in a business owner’s best interest then to prepare carefully when approaching a bank or other financial institutions for a loan. Doing so will save time, money, and effort, and expedite the process of having your request approved in time for use of its intended purpose.
Bank of America, described by The New York Times as the nation’s largest brokerage house and consumer banking franchise (albeit being severely hit by the recent financial crisis), has a comprehensive guideline about what to expect should a business owner find himself in need of a loan.
For starters, Bank of America offers business owners the seven 7 C’s to consider before proceeding with a bank loan application:
Must be good; Problems must be explained
The business must be able to support its debts and expenses, and be proﬁtable.
Money you or investors are putting in or equity you already have in the business
The value of assets that secure the loan
Of the borrower and guarantors
The economy, industry trends, or anything that will affect your business
Your ability and your willingness to succeed which involves guaranteeing the debt personally even if the company can’t pay it
Furthermore, the following preparations can help small and medium-sized businesses more successfully get a loan approval in less time, and with more confidence from banks and other financial institutions:
First, determine what you need the loan for.
Working Capital – used for the business’s expenses, based on a cash flow analysis showing the amount needed; often covered by a revolving line of credit
Inventory – You will need to prove your inventory needs and expenses by projecting your income/sales, expenses and proﬁts. Buying the inventory may require an intermediate – or long-term loan. A line of credit can also cover some inventory needs.
Equipment, Machinery, Furniture and Fixtures – Loans which help buy these items are proven with quotes. These items can often be rented or leased which helps because no down payment is required. Your older assets may have some value; they can often be reﬁnanced or sold (and leased back from the buyer).
Second, assess how long you can pay off the loan.
Loan payments are usually made in installments, every month. It can be any of the following terms:
Short term – less than a year; maybe a line of credit (LOC) or a “bullet note”; has a predetermined loan limit, just like a credit card; on LOCs money is used when needed, and then repaid.
Smaller term loans – ideal for buying a business, long-term working capital, inventory, expenses, machinery, equipment, furniture, and leasehold improvements. Obtain quotes and estimates to find out total amount you need
Longer-term loans – used to buy or refinance commercial real estate, make improvements or addition to real estate, or purchase major equipment; these loan needs are determined with buy-sell agreements, appraisals and quotes
Third, organize all the necessary business documents for the bank’s review, including the following:
• professionally prepared tax returns for three years;
• ﬁnancial statements:
If you are starting a company, also include:
• list and value of collateral;
• accounts receivable aging (list invoices by how old they are);
• accounts payable aging (as required by your lender)
Prepare a business plan.
A business plan is a document that gives an overview of the company, including goals and earning objectives, and informs its business staff, suppliers, and others about it. It is also created when the company plans a major change in operations. Financial statements are included in it, as would projections for a start-up business.
Loan requests also require a business plan because it would also include how the loan will be used and repaid. It helps the business distribute resources effectively, develop an instinctive foresight to avoid complications, and serve as a guide in decision-making.
A good business plan must include the following:
• An Executive Summary (description of owners);
• Your management & employees;
• Your marketing plan;
• A competitive analysis;
• Your business location;
• Your operations;
• Your Loan Request ;
• Financial Statements (Balance Sheet, Income Statement, Personal Financial, and Cash Flow);
• Appendix which explains the details (for example, resumes, inventory evaluation,
The items included in this list may seem like a challenge for business owners to come up with, especially if one does not regularly keep records of the business. Preparing for a loan is just one instance that necessitates business owners to be fastidious about record-keeping. In this regard, seeking the advice and assistance of experts such as accountants and tax lawyers becomes an integral part of the preparation to ensure the accuracy of data in the documents.
The meticulous approach to getting ready to apply for a loan will surely not be lost on the lender; it can even turn out to be impressive enough to give you the edge to get the bank’s approval for what you need.
eBusinessAppraisals.com provides professional, third-party business valuation services designed to maximize the value of businesses, and meet the exit strategy objectives of its owners. We have more than two decades of advising and deal-making experience in middle-market businesses.
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