It was always difficult for small businesses to get bank funding. Banks seem to be overly cautious these days when it comes to small business lending. It is more important than ever to put together an air-tight, fully documented loan request package.
When applying for a bank loan, approach it in the same way you sell a customer. You need to “sell” your banker on the merits of your business and the reason you need the capital. To do this, there are some key components that you need to have in good shape when asking your bank for a loan.
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Create a Business Plan
This is your way of showing your bank that you have a long term financial plan and that your business can support repayment of the loan. It also shows that you are a thoughtful entrepreneur who is taking a rational and strategic approach to growing your business. While it might not be the most critical document that a bank considers for determining your worthiness as a borrower, it is still an important component of your pitch. While credit worthiness is a key factor, the bank needs to know that the business has the management and financial capacity to repay based on a demonstrable and credible strategy for generating sufficient revenue.
The business plan should include a profile of the business including its mission, objectives, description of product or services, key people biographies, customer profile and market focus, form of ownership, revenue history and any evidence of distinction.
The bank will want to know what the business knows about its market and how it differentiates itself from its competitors. The stated demand for the company’s products or services must be supported with credible and current data, especially if you are using the proceeds of the loan to support expansion. The plan needs to include specific strategies for generating new customers and retaining current ones.
Business Loan Purpose
Explain the contemplated amount of the loan and the specific funding purpose. The funding purpose should be detailed in its description of how the capital will be used to achieve the objectives or strategies outlined in the business plan. While the amount may be estimation, the bank will want to see how the capital infusion will translate into an increased capacity to repay the loan.
Business Financial Statements
The business financial statement should include a three year balance sheet and profit-loss record. The balance sheet should be accompanied by details of major assets such as equipment and real property. Cash flow projections should be based on a strict accounting of current receivables as well as intended customer receivables based on existing contracts.
Personal Financial Statements
Before you go to the bank, check your credit reports and your credit scores to make sure there aren’t any mistakes that are lowering your scores. If there are, clean these up before you submit your loan application. Your personal financial statement is equally weighted in the bank’s consideration of the overall financial management capacity of the business. You’ll need details on your income for the past two years, plus a listing of assets and liabilities. Because an owner may need to provide a personal guarantee of the loan, the financial condition and credit worthiness of the owner is paramount in the loan decision.
Most business lenders are hesitant to loan capital without some solid form of guarantee or collateral. Banks will look to the existing equity position of the business that includes equipment and property assets as collateral. They will also consider the owner’s own equity position and his or her capacity to raise funds. All sources of collateral should be fully described in a loan application. As an owner, you may be required to personally guarantee the loan repayment. Approach this very carefully, as it can have dire personal financial implications should your business suffer reversals that cause it to default on the loan.
Loan Package Documentation
Although these key items comprise the critical foundation of the loan request package, it is not uncommon for the bank to ask for additional supporting documents. Meet with your banker before you actually apply to discuss the loan and get a sense of your bank’s willingness to advance the requested funds to you. It will be a better impression if the loan package looks professional when submitted, so take some care with this aspect. Business financial statements should be audited or, if possible, prepared by your accounting firm. A business that knows how to present itself competently can more quickly earn the confidence of the bank lending officer and this will help improve your chances of obtaining the loan in the amount you wish.