What you need to know about getting a business loan

Developing and maintaining a relationship with your banker has never been more important. Most businesses rely on their bank for essential services such as checking & savings accounts, equipment loans, working capital lines of credit and commercial mortgages. A business owner’s relationship with their banker should be built on mutual trust and respect and based on value not price. The old adage “you get what you pay for” is applicable to most things in life including a business banking relationship. It may cost a bit more for a banker who is truly a valuable business advisor rather than simply an order taker, but it’s worth it!!!
A specific value that a banker can add to the business relationship, especially today is to educate their clients about what is typically needed when applying for a business loan. Most business owners are unsure what bankers are looking for when evaluating a loan request. That confusion can only be compounded today by all the talk of tight credit. Credit is absolutely available today. In order to avail themselves to it, business owners should be aware of the process that goes into considering a loan request and the type of information and documentation they will be expected to provide.
When a business owner is seeking a loan they should be prepared to discuss:
1. The amount of the loan
2. The purpose of the loan– to purchase assets, payoff old debts, fund operating expenses, buyout a partner, etc
3. The security being offered for the loan – collateral such as real estate, equipment, inventory, accounts receivable, stocks, bonds, etc
4. The term of the loan – how long will it take to repay the loan
5. The company’s financial condition – past, present and future
The banker will typically look for documentation to support the loan request and measure the relative financial health of the business and the principals…documentation such as:
1. Federal tax returns (2-3 years) for both the business and principals
2. Year-end financial statements (2-3 years)for the business
3. Year-to-date and projected financial statements
4. A personal financial statement – listing what the principals own & owe
5. Business bank statements (2-3 months)
Lending money is all about managing risk. To help bankers evaluate risk more completely they will typically test a loan request and accompanying financial data against the following criteria.
1. Character – Does the borrower exhibit character or integrity? Does the business and its owner have a good reputation in the community?
Does the borrower exhibit a good credit history? Does the business and its owner pay their creditors on time?
2. Capacity – Does the borrower exhibit the financial capacity to repay the loan requested? Is sufficient cash flow available to make the payments?
3. Capital – Does the borrower exhibit sufficient capital to support the loan requested? Is there sufficient cash for a down payment and for a cushion in case business gets slow.
4. Collateral – Can the borrower provide sufficient collateral to secure the debt? Are there assets such as real estate, equipment, A/R or inventory that can be pledged to the bank as security for the loan?
5. Conditions – Is the condition of the borrower, the borrower’s industry and the general economy favorable to the repayment of the loan? Are there aspects of the business, the industry or the economy that would negatively impact the ability to repay?

Loans for small businesses are available. Community banks are ready, willing and able to provide that much needed financing. But, now more than ever businesses must be able to provide the information and the documentation necessary for bankers to assess and mitigate the risks inherent in making loans. Being prepared before you apply is an important first step which will accelerate the process and increase your chances for an approval.