More times than not, obtaining credit appears to be a mysterious process for a loan applicant, one with its share of paperwork. With some preparation on your part, applying for a business loan can be made a lot simpler, increase your chances for approval and ensure business success.
A number of publications are available to prospective borrowers to ease the challenge. Particularly helpful to the business owner is Steps to Small Business Financing, a joint publication by the American Bankers Association and the National Federation of Independent Business. The publication outlines how to apply, what documentation is needed and the mechanics of application.
According to Steps to Small Business Financing, there are four basic questions you'll need to answer:
1. How do I plan to use the money?
2. How much do I need and why?
3. How long will I need the funds?
4. How do I plan to generate cash to repay the loan?
The more prepared you are to answer these questions, backed up with supporting financial documentation, the faster the lender can make an informed credit decision.
Your banker will want to see two basic financial statements: your balance sheet and profit-and-loss statement. The first helps to measure the solvency of your business, while the second documents past income and expenses. Banks also like to see three years of financial statements to establish a comfort level with a company's historical performance and to gain a sense of future performance potential. To demonstrate your need for financing and its effect on future cash flows, include data on sales projections and cash flow zproformas.
You will also need to familiarize yourself with the types of loans available in order to apply for the loan that best meets your credit needs
Short-Term Loans - Short-term loans are just that - loans limited to a short period of time. The most common is the line of credit. Often written for one year, subject to annual renewal, a business owner can borrow as needed up to a certain approved amount. The line of credit is "revolving" because business owners can borrow and repay as often as necessary, provided the amount owed does not exceed the approved credit limit. This type of loan provides the borrower the flexibility to keep an even cash flow, especially for businesses subject to seasonal conditions.
Intermediate-Term Loans - Intermediate-term loans usually require some form of collateral and are written for no more than three years. They meet the needs of borrowers who are just starting up a business, expanding or purchasing new equipment. Payments are made from the business's profit, usually on a monthly or quarterly basis.
Long-Term Loans - Exceeding three years, long term loans are generally secured by collateral (i.e., assets being purchased as well as personal assets such as stocks, bonds, certificates of deposit, other business assets). Proceeds from long-term loans can be used for starting up a business, purchasing major equipment or relocating the business. Long-term loans are also repaid in monthly or quarterly installments from profits or cash flow. Since this type of loan is substantial, certain provisions may be contained in the loan agreement, including limitation of other company debt, dividends or salaries paid, a minimum equity requirement, specific working capital levels and a percentage of profits to be used just to repay the loan.
Commercial Mortgages - Business owners who need to buy, enlarge a building or purchase property may consider a commercial mortgage. The loan amortization term is traditionally 20 to 30 years; loan maturity is typically five to 10 years with renewal options. The mortgage is based on 65% to 75% of the appraised value of the property. The building is usually used as collateral. For properties already mortgaged, second mortgages are also an option, provided both mortgages do not exceed a specific percentage of the appraised property value.
Once you have done your homework regarding your credit needs and credit-worthiness, shop around for the bank that provides a competitive rate and the customer service you deserve. Familiarize yourself with the different loan products offered, including fixed and variable rate loans. After taking these steps, the entire loan application process will make sense and you'll be on your way.
Salvatore Curasi is Marketing Coordinator with PFF Bank & Trust.
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