Business owners and principals may be under the impression that they can't obtain a loan in the current economy, but that's not necessarily true. Many lenders are welcoming business customers with open arms.
Business owners should seek a trusted lender with whom they feel comfortable. The right financial institution can become a powerful business ally-assisting in the process of acquiring financing and maintaining a long-term relationship. If networking and development opportunities are important, seek a lender who offers those additional resources.
Bring ideas to your lender and share your vision for successful business growth. That groundwork can start the process that will take your business to the next level.
Applying for a Loan
Begin the loan application process by gathering both personal and business financial information. Especially if this is new territory for your business, find a lender who will help simplify the process and answer any questions that arise along the way.
Required documentation includes an owner's three most recent personal and business tax returns. Year-to-date financials for the company also are necessary.
If the business is a new venture that doesn't have a three-year track record, the owner's industry-specific management expertise becomes important. That expertise, combined with his or her personal financial history, can offset the three-year business history requirement. Be sure to ask the lender to clarify any questions or address any concerns upfront.
The applicant will also need to prepare a statement of personal net worth, which is calculated by tallying assets and subtracting liabilities. Begin by listing your largest assets--for most people, this would include a home and vehicles. For liabilities, start with major outstanding debts such as the balance on a mortgage or car loans. Also list credit card balances, student loans or any other debts.
Your financial institution should be able to assist in compiling this information, but the U.S. Small Business Administration also offers a free online course on how to prepare a loan package. Visit http://web.sba.gov/sbtn/registration/index.cfm?courseid=28 to learn more.
Three C's of Approval
Financial institutions use uniform criteria when evaluating proposals for business financing, whether the application is for a $50,000 line of credit or a multimillion-dollar loan for a commercial property acquisition. Three criteria all are intended to answer one question: Can the borrower repay the loan on time? The evaluation of these criteria can also play a part in determining the loan's interest rate and terms.
Credit history -- Provide a complete schedule of business debt. Include each lender's name, original loan amount, current balance, purpose of the loan and what collateral was used to secure the loan. Specify, for example, if the last loan was to buy a workspace or acquire equipment. Tell the prospective lender about the history of the loan and your payment record.
Review the business's Dun & Bradstreet commercial credit report as well as your personal credit report. Be ready to discuss any blemishes on the reports with the lender. To give a financial institution the most complete picture of your credit record, be sure to include information about previous loans that have been repaid.
Collateral -- Every business loan is secured with collateral, but not all collateral is created equal. Owners should discuss how they want to secure a loan and how much that collateral is worth to the lender.
Real estate purchases often are the easiest to assess. An owner who wants to purchase a new site may be able to borrow up to 80 percent of the value of the property or the purchase price. For companies seeking funds to buy machinery or other equipment, a lender may allow 50 percent to 60 percent of the value of those items to be used as collateral.
Buying a new truck or office equipment? A line of credit usually is the best tool to use for working capital. A typical line of credit for a small business is around $50,000 and requires a pledge of assets or inventory equal to the loan amount.
In all cases, be prepared to sign personally for the loan.
Cash flow -- Applicants need to develop, and include, an operating budget that shows what revenue will be used to pay back the money and at what pace. Consider a new revenue source or new customer group that will be generated by a service expansion financed by the loan. What increased production may be realized with new equipment purchased with the loan? Be specific about the source and the projected volume of cash flow as funds are put to work in the business.
Applying for a commercial loan has many steps and can be confusing, particularly for those who have never before sought financing. Business owners should rely on their financial institution to guide them through the process. After all, in the end, your success is their success. The right lender will want to work with you to grow your business.
Greg Kidwell is CEO and treasurer of Members First Credit Union, a full-service financial institution located in Grandview Heights. He can be reached at (614) 462-6850 or firstname.lastname@example.org.
Reprinted from the May 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.