Applying for a business loan can be time-consuming and complicated. But proper preparation is critical as there may be only one opportunity for credit approval. Loan requests may be declined based solely on insufficient or inaccurate data, even though the business may be credit worthy. With this in mind, the following is a proven approach for effective preparation of a loan documentation package which will facilitate the lender’s review of your business.
Important points to understand about lenders:
- Lenders’ risk tolerance is much lower than an equity investor.
- Lenders must be conservative with the risks taken when extending loans.
- Lenders are not in business to lose money.
Pre-requisites of any successful approach to securing debt capital:
- Good credit history is needed.
- A business owner must be willing to put money into the business first, as owner’s equity.
- To enhance the probability of loan repayment, a lender expects collateral to secure the loan.
- Any loan request requires a thorough, well-documented loan package.
- A well-constructed business plan describing the business and its growth plans, complete with financial projections, should be submitted, as part of the loan documentation package, to support the credit request.
Lenders typically look for documents that address the 5 C’s of credit:
- Capacity – most critical is the capacity or ability and timing to repay the loan
- Capital – amount of capital in the business, an indication of personal risk taken
- Collateral – second source of repayment
- Conditions – conditions of loan, such as interest rate and amount of principal, depend upon intended purpose of loan, economic climate of business, etc.
- Character – trustworthiness of borrower, educational background, experience and general impression of borrower go into assessing the character.
The elements of a Loan Package that assist a lender in assessing the 5 C’s of credit lending are as follows:
Personal Information (needed for all owners with 20% or more ownership)
- Tax returns for prior three years
- Personal financial statement
- Credit report
- Credit report
- Business tax returns for prior three years
- Business data sheet showing date established, tax ID number, business checking and savings account numbers, type of ownership, etc.
- Financial statements for prior three years and current interim period
- Articles of incorporation
- Business plan – including a business description, business goals and objectives, market analysis, marketing strategy, management team and organization overview, and business operations overview
- Financial projections for current year, shown monthly, and next two years (shown annually)
Other Supporting Documents
Depending upon the facts and circumstances of the business, other supporting documentation could include employment contracts of key personnel, significant leases or contracts, marketing agreements, copies of patents or trademarks, etc.
The Lender’s Review
With the documents above, the lender can easily assess the business’ past and current financial performance and gauge its future potential based on its projections, marketing strategy, operations and management organization and its competitive environment. A well-constructed loan documentation package provides a business the opportunity to present its best potential to its lenders, thus increasing the potential for debt funding!
Suncoast CFO Solutions provides an affordable solution for smaller businesses operating without the role of a CFO by offering part-time CFO services tailored to the needs of the business. To learn more about preparing for successful debt funding or other ways we can add value to your business, contact us for a free consultation or, for a nominal fee, an in-depth Business Analysis of your business. Visit us at suncoastCFOsolutions.com.