Part 1 – A Process Summary
This is a four-part series on just what it takes to obtain a business loan and understanding the process you might face in running your business with someone else’s money.
Today many businesses are experiencing growth opportunities and need capital to finance growth. So, what do you have to do to get a banker to loan you money for that growth?
Let’s start by understanding how banks operate. Many newspaper articles state that low interest rates are driving banks to make more loans to keep their earnings up. This is only partially true because banks are still highly regulated and there are multiple regulators that have a lot to say about bank lending policies.
Five Key Steps
First step: Not all banks lend to all industries, so you need to find a lender that services your industry. You start by asking bankers if they loan to your kind of business and size of business.
The cost of the loan (interest rate and fees) is not where you start, nor should it be an issue until you fully understand the process of loan approval of the bank. Loan covenants (bank restrictions that require the borrower to fulfill certain conditions) could be more important than cost.
Second step: Study the loan application to determine if you have the data required to apply for the loan. Three years of financial history and three years of forecasts are generally required.
Keep in mind that whoever does the credit review needs to understand how your business makes money and competes in your market(s). The more you can provide a positive picture of your business, the easier it is for them to say yes.
Examples would be reasons why your outlook is positive and how you plan to use the lender’s money to grow your business.
Caution: Do not make multiple loan applications all over town. Each bank that you apply to makes a credit report inquiry that banks will see, plus each inquiry reduces your FICO score by 5 points. Not a good thing!
Third step: Your financial information must have supporting documentation to show support that it is accurate, and that you can answer questions regarding trends in your industry.
Accounts receivable aging reports, accounts payable aging reports, and inventory reports are examples of supporting data. If you understand this data and can explain why events happened the way they did, you are a long way towards making the lender believe you are knowledgeable in your business. Confidence counts!
Fourth step: You also need to find supporting information for your forecasts and it needs to relate historical trends to your positive outlook on the business.
If your industry is growing and pulling you along-great! If your industry is not growing and you believe you can gain market share, show your strategy of how you will do that.
Fifth step: Your packaging of the data and the story of your business needs to be organized so a reader may understand your business quickly in a summary. A short summary of your industry traits, customer base, and business operations should be the beginning of the application, followed by data tables and graphs to support your narrative.
Think about the purpose of the document: to allow a third party to understand your enthusiasm, to understand how you make money and how your cash flows. This will kick-off a serious discussion that is the beginning of obtaining new capital.
C Squared offers a process and guidance through this analysis. Contact us for additional information. We Welcome your call – 303-417-6353