Borrowing for your Small Business

In order to lend to you, your bank will probably ask for some information. How much they want depends on how large your loan request is. Small requests (in the $50,000 to $100,000 range), may be approved via credit scoring. Larger requests are addressed in this article.

Basically, there are two main areas of information the bank will ask for.

First, they need to know who you are, what you do, and how you do it. In order to do this, they should visit your business, and chat about these things.

In addition, they will need a complete package of financial information including the following:

1. The most recent three fiscal year end CPA prepared Financial Statements

or

The three most recent corporate tax returns.

2. The most recent interim balance sheet, and profit and loss statement.

3. Personal tax returns, for the two most recent years available, for each person who will guarantee the loan.

4. A current personal financial statement for each person who will guarantee the loan.

5. Summary of current stock ownership (that is, who owns the business), if not included in tax returns submitted.

Also, the package should include any other information you would like to provide, or you can discuss these things when you meet with your banker: A basic history and description of your business and a description of any financing needs you have or may want. The bank can probably help you with both personal and business financing.

There will be some additional documentation necessary when loan documents are created, such as a filed copy of your Articles of Incorporation, a copy of the business registration and licenses, and Tax ID Number for the business.

This is what your bank will do with it:
Most businesses have three primary types of loans they might need; Operating lines of credit, equipment purchase loans, and real estate purchase loans (or refinances of each of these types).

Operating lines are used to support the needs of the business due to timing differences of cash received and bills due. For example, a manufacturer will need to pay for materials and labor associated with producing a product, but will not get paid for 30 days after shipping the product. Many businesses use an operating line to fund this production while waiting for the payment to be received.

For a request to set up an operating line the bank will look at your levels of liquidity and working capital to determine if your business can support this type of credit. This will include looking at a business credit report to see if creditors are paid current. It will probably include looking at your accounts payable listing, and will include looking at your receivable aging, and the turnover ratios of your receivables and payables.

What they see will determine the structure of the line, and can include various provisions for administration. For example, they can have your invoices direct the payments directly to the bank, you may be asked to submit monthly agings of receivables and payables, and monthly financial statements. In addition, you may be asked to sign a loan agreement that specifies certain covenants that require you to maintain specific levels of working capital or other conditions. These loans are generally made with a one year maturity, meaning that the bank will assess your performance and financial condition each year.

Equipment loans are usually made for a period of five years or less, and will be fully amortizing. That means that the loan will be completely paid off after monthly principal and interest payments for the term of the loan, with no balloon payment due at the end.

Usually you will be expected to provide some sort of down payment on equipment purchased, and refinances will be for less than 100% of the value of the equipment. Usually, the bank will try to make the terms of the loan match the expected life of the equipment. For example, if you are heavily dependent on technology and routinely replace your computers, they might want a maximum term of two years.

Your history of profitability determine your ability to service a loan payment like this. It is possible for you, in the short term, to sell assets or increase liabilities to allow you to make the payments on this type of loan, but ultimately you need to be profitable to be able to service debt.

Real estate loans are usually made for the purpose of housing the business. These loans are often made to the owner of the business individually, where the business is a corporation. Here again the bank will look at profitability, but will also be able to consider rent that you no longer have to pay. Normally, the rate will not be fixed for more than five years, but amortization can be up to 20 or 25 years.

General Items: No matter what the loan type, you will be asked to provide a personal financial statement, and to personally guarantee the loan to your business. The bank will want your deposit accounts if they make you a loan.

The process of finding the terms and conditions of a loan that will serve your needs, and meet the bank's needs, can sometimes be difficult. However, in my opinion, the banker's job is to assist you in finding the middle ground that is fair both to you and to the bank. This is a collaborative process that takes some give and take between you and and the bank as you move toward a conclusion.