Part 3-Supporting the Loan Application
Previous parts covered the overview of the process and the first two steps of the process. This Part 3 covers the steps which are usually the most difficult for smaller or medium sized businesses. That is providing detailed financial and operating data history. Folding your history into a detailed forecast is even more difficult as you must document your assumptions for trend changes.
Providing historical financial statements (income statement, balance sheet and cash flow) is just the beginning. Lenders will also want to know who are your key customers, key suppliers and how much business was transacted over time. They will also want to know your gross margins by product, service offering and client.
In short, lenders want to know how and where you make your profits. If you are a manufacturer or distributor, they will want a great deal of information on your inventory turns, inventory obsolescence and scrap rates.
You don’t have to have audited financial statements if your credit request is small (under $1,000,000) but your supporting data must be sufficient to convince the lender that the data is likely correct. Larger credit requests will require audited financial statements or at least reviewed statements if asset coverage greatly exceeds the loan amount.
Taking the historical data mentioned above and turning that into a three year forecast explains to a banker how you plan to get from point A to point B to point C. This forecast process is most often done through Excel spreadsheets and has a detailed explanation of assumptions, ratios and formulae attached. Recipients will pay specific attention to changes in trends, causes for the changes and variability of profitability. You will likely be asked to run multiple scenarios for risk sensitivity assessment.
You start by having a sales forecast with assumptions on customers, pricing and timing of sales. Your cost of sales will flow from this and should include your gross margin assumptions.
Loan applications vary by lending institution but generally require the same information. The format often follows the format used by the SBA (Small Business Administration) as a potential short cut if the SBA gets involved.
By reviewing the loan package requirements, you will be able to plan your efforts. For example, in addition to financial history and forecasts, they will want copies of key documents. These are lease documents, customer contracts, supplier contracts, notes or debt instruments outstanding, partnership agreements and other legal documents that spell out obligations or ownership rights.
In most cases the business owner will also need to provide personal financial statements where a personal loan guarantee is required. (It is always required on SBA backed loans.)
Discuss potential issues with the lender to determine how flexible they are; especially if your presentation format gives them better information to understand your business. You don’t get if you don’t ask.
C Squared offers a process and guidance through this analysis. Contact us for additional information. We Welcome your call at 303-417-6353