Preparing for Small Business Loans
There are many different financing opportunities for small businesses including government-backed loans such as
Small Business Association loans, those backed by the US Department of Agriculture, and traditional business loans
funded through your local community bank. No matter what kind of business loan you may be seeking, it's imperative
to learn all you can about the steps and requirements that will be critical in applying for a loan. This column will
be devoted to providing insights on some of those things you'll need.
Start Out with Good Credit
When a small business requests a loan, one of the first things a lender looks at is personal and business credit history.
So before you even start the process of preparing a loan request, you want to make sure your credit is good.
Business Plans Are Essential
You wouldn't apply for a job without first submitting a professional-looking resume that outlines all your skills and experience.
And, seasoned sales people know that a distinctive calling card can open doors. A professional and thorough business plan is
equally important for a small business when applying for a loan. In fact, it is reported that 50 percent of all declined loan requests
are good loans, but they are poorly presented.
A business plan serves as your firm's resume, precisely defining your business and identifying your goals. It is essential in negotiating
with service providers and vendors. As it provides specific and organized information about your company and how you will repay borrowed
money, a good business plan is a crucial part of any loan application.
A good business plan will outline who you are, why you are in business, what you are doing, where your business currently sits financially,
and where you want to take you business in the future.
The small business owner will succeed by including some basic components in a new business plan.
Be sure to include a current and pro forma balance sheet, income statement and a cash flow analysis. It helps you allocate resources properly,
handle unforeseen complications and make good business decisions. Once your business is up and running, you will need to regularly review and
update your plan to manage growth.
Understand How Banks Evaluate Applications
Before you approach a lender for a loan, it is a good idea to understand as much as you can about the factors the bank will evaluate when they
consider your application. The ability (or capacity) to repay the funds you receive from a lender must be justified in your loan package.
Financial management involves all the activities that enable a company to obtain capital for growth, allocate resources efficiently, maximize the
income potential of the business activity and monitor results through accounting documents. Such management requires a well-written, comprehensive
financial management plan clearly outlining the assets, debts and current and future profit potential of your business.
Understanding financial statements is essential to the success of a small business. Financial statements can be used as a roadmap on your business
journey to economic success. Using numbers as navigation aids can steer you in the right direction and help you avoid costly breakdowns.
Explain How You Will Repay the Loan
When a financial institution gives a loan, it wants to make sure it will get its money back. That is why a lender wants to see two sources of
repayment - cash flow from the business as well as a secondary source such as collateral - personal and business assets that can be sold in case
the cash generated by the small business is not sufficient to repay the loan. Every government-guaranteed loan program requires at least some
collateral. Lender's do not base the value of collateral on market value; rather, the value is discounted to take into account the value that
would be lost if the assets had to be liquidated.
Who Will Manage Your Business is Important
Managerial expertise is a critical element in the success of any business. In fact, poor management is most frequently cited as the reason
businesses fail. So lenders will be looking closely at your education and experience as well as that of your key managers.
Important Questions to Ask Before Applying
Before you apply for a loan, you need to think about questions like these:
- Can the business repay the loan? (Is cash flow greater than debt service?)
- Can you repay the loan if the business fails (Is collateral sufficient to repay the loan?)
- Does the business collect its bills?
- Does the business pay its bills?
- Does the business control its inventory?
- Does the business control expenses?
- Are the officers committed to the business?
- Does the business have a profitable operating history?
- Does the business match its sources and uses of funds?
- Are sales growing?
- Are profits increasing as a percentage of sales?
- Is there any discretionary cash flow?
- What is the future of the industry?
- Who is your competition and what are their strengths and weaknesses?
If all of these questions are overwhelming, it might be advisable to schedule an appointment with your lender for regular checkups.
Your local community bank will be happy to review your financials and provide some guidance to help you through the loan process and beyond.