While small business owners appear to have a good grip on managing their companies, they are often unsure about what to do to properly prepare for loan approval.. According to the Small Business Association Lending Index report, big banks approved 15.1 percent of small business loans in February 2012. While we are seeing a slight rise to 15.9 percent in February 2013, the banks may be even more likely to provide a small business loan, if business owners knew what they should present a potential lender.
The first step is to meet with the lender’s business development officer (BDO). The job of a BDO is to make prospective borrowers feel like part of the family. Many business owners are fooled into thinking that just because the BDO likes them, they are getting the loan of their dreams. However, meeting with the BDO is just a preliminary step; the real audience to impress is the credit and loan committee of the lender
Below is a short list of information and documents every small business owner should prepare to ensure the highest possibility of getting the loan approved:.
Prepare a short description of the business. The very first questions a lender will ask are who, what, where, when and why of your business. It may seem like common sense, but most owners forget to write a brief description of their business. The description should include short sections detailing products, services, customers, competition, history, management, and ownership. A good test of whether or not the business description works is to give it to a fifth grade student, and see if the 11 year old can describe the business to his or her friends. We may not be as smart as a fifth grader, but if an 11 year-old doesn’t get it, then the description isn’t going to work well for a lender.
Gather financial statements. Banks require three years of historical financial statements, year-to-date financials, and actual to prior year. Asset based lenders, such as a factor, will require much less historical information since they are making a credit decision based on what will happen in the future. Regardless, the financial statements need to tell a simple story so the credit staff can quickly calculate EBITDA, tangible equity, debt-to-equity, fixed charge coverage, quick ratios, and liquidation values from the sale or collection of assets. It’s even better if the financial statements include these calculations and ratios before the lender has asked.
Estimate projections. While the financial history is important, the future is paramount. Lenders want to know how the business is going to use the proceeds of the loan and what steps are taking place to ensure the business is going to grow. Banks do not want to lend to a business that is declining or on the verge of failure, so it is valuable to demonstrate signs of growth. Projections should be easy to understand and should be presented on the same basis using the same line items as the historical financial statements. Do not make up unattainable forecast sales and/or margin improvements, as lenders will see right through this, and the business owner will quickly lose any credibility.
Submit accounts receivable, accounts payable and inventory aging reports. Ask the lender if they want summary or detailed aging reports. All lenders are different and it is best to give them exactly want they want. The important detail to remember is that it is quality over quantity.
Show tax returns. Tax returns are important because they validate how reasonable the financial statements and projections actually are. Not all lenders will understand the detail in the tax returns, but you can be sure they will want them.
Provide personal financial statements. Business owners and key members of executive management should provide personal financial statements. Banks and some asset-based lenders will require this information, and doing so will make a much better first impression when the information is provided without being asked. After all, lenders will not be as inclined to provide a loan to a company with a management team that can’t manage their personal life.
Get the “bad” information out front and center. Whether the “bad” information is about the owner, company, or shareholders, get it all out in the open and do not wait for the lender to find it. A lender will dig up the dirt, and so it is always best to be forthcoming. Remember, all lenders have access to data bases that provide “instant background checks” on people and their businesses.
Preparation for securing a loan begins with making a good first impression. It may seem like a lot of work, but with a little forethought it can be done. Remember, even the best first impression doesn’t guaranty the loan will be approved, but it will certainly help increase the chances for approval.