Tag Archives: bank loan

A Guide to Applying for a Bank Loan

A Guide To Applying For A Bank Loan

Every business at some point will require outside financing; his generally means obtaining some form of bank loan. For many, this turns out to be a very aggravating and frustrating process. You may be financing a new business or simply be in need of seasonal financing, but proper planning will substantially enhance your chances of obtaining a bank loan. Additionally, you’ll learn more about your business through this process.

Various methods of outside financing include venture capital, an outside investor or bank financing (the most common method). Many banks offer both conventional and SBA loans. Talk with your banker to see which type of loan makes more sense for your particular situation.

Preparing the Loan Package

There are five components to preparing a loan package. I’ve broken the sections down below. Remember to customize each to your specific situation.

1. Financial Data

Usually two to three years of internal financial statements will be required as well as three years of projections on the balance sheet, income statement and cash flow statement. Other financial data may include prior year’s tax returns, financial ratios, information of historic growth rates, etc. Include any other information that will convince the banker of the fiscal soundness of your business. If your financial performance has been poor, emphasize the positive aspects of the business such as improved gross margins, increases in cash flows or key financial ratios.

Businesses that are start-ups will not have prior financial data. In these situations, projections and budgets are critical. These budgets and projections should be supported by factual information to support the fact that goals are creditable and not just “pie in the sky” wishes.

2. Industry Data

Including knowledge of pertinent financial ratios and industry statistics will further convince your banker of your creditability. Be sure to point out areas where you exceed the industry’s performance in a particular area. Sources for this type of information are trade associations and Internet resources. One such Internet source is First Research.

3. Ownership Information and Resumes

This information is important no matter whether you are starting a new business or trying to obtain funding for an existing business. Information about you and other principal stakeholders in the business regarding background, education, experience and capabilities is vital.

4. Financing Plan

In a well-written narrative format, explain the reasons for the financing request and the amount and repayment terms of the request. Identify the use of the loan proceeds. All of your loan package, including this section, should be tied together into a concise, financing plan.

Other information may be needed to substantiate your loan request. When requesting financing for a new business, always include information on marketing, management plans, industry background and predictions, and pro forma financial information.

If a working capital loan or line of credit is requested, you should provide information on how much funding will be needed during slow periods and how it will be repaid during peaks.

One important rule to remember is not to hide unfavorable information. A particular area where this comes into play is the strengths and weaknesses of the company. Such information should be fully disclosed, including how you plan to overcome the problem. Full disclosure will add to your professionalism, while the failure to disclose will undermine your creditability.

5. Secure a Second Opinion

Last, but certainly not least, is to have someone else look over your loan package; this includes a financial advisor or CPA. This person can offer an objective analysis of your efforts, point out shortcomings and make suggestions for improvements.

Do your homework before applying for a loan. Know your business, know your industry and know the answers to questions before they are asked. Having this information will greatly enhance the probability that you will be successful in obtaining your loan.

For more information about applying for a bank loan, visit B2BCFO.com.

bank loan

How To Get A Bank Loan Approved

Banks, in general, have done a poor job of informing businesses what it takes to get a bank loan approved. In the bankers’ world, many of the most important considerations are what we refer to as the Five C’s of Credit:

Capacity: History of positive cash flows

The best predictor of a business’s likelihood of repaying a bank loan as planned is a proven history of positive cash flows. This cash flow history needs to be adequate to make loan payments on the new bank loan request, plus a little. Banks desire a debt service coverage ratio  of approximately 1.30 multiplied by the debt service. Notice that I said a history of positive cash flows. Because startup businesses don’t have a “history” of operations, it is very difficult, on their own merits, for them to obtain almost any type of bank financing.

Collateral: Adequate collateral support

In the event that future cash flows are not sufficient to make scheduled bank loan payments, banks want some other business asset or assets to serve as a back-up source to satisfy bank loan payment obligations. Collateral can take many forms but often will include accounts receivable, inventory, real estate and equipment, as well as other assets. When calculating acceptable collateral, banks will want the value of the collateral to be greater than the amount of the principal amount of a  bank loan. Whenever a bank attempts to liquidate collateral, they rarely are able to realize fair market values for the asset being sold. Therefore, the collateral value needs to be one-third to one-and-one-half times greater than the loan amount.

Capital: Adequate capital to support normal business operations

Although a business starts out with a vision in a person’s mind, it rarely makes it to the next stage without capital to help make this vision a reality. Capital, in this sense, is the amount of personal source funds and prior earnings retained by a business. The far-and-away No. 1 reason loans are turned down by banks is that a business does not have sufficient capital. It’s not unusual for business commentators, and occasionally politicians, to suggest that a business obtain capital from its bank. This is poor advice. Banks provide loans to businesses long after the business owners find or earn capital to support formation and operation of the business. Typically, banks will require a business to show something in the range of 30 percent capital divided by the equity as a percentage of total assets.

Conditions: Conditions affecting the business

Many internal, as well as external, conditions have an impact on a business. Although a business owner may have little or no control over these conditions, it is critical that the business owner be aware of them. Additionally, the business owner needs to have a strategy and plan for managing the impact of these conditions on business operations. External conditions include governmental regulations, business climate and competition, while internal conditions include staffing, management, operational issues and many others. The business owners’s grip on understanding conditions and demonstrating the ability to deal with them is critical to the bank.

Character: Borrowers, owners and management need to conduct themselves in business and personally in good character

A good reputation as a business and as a person is one of our most important assets. Bankers care about how business is conducted and how individuals conduct themselves. Indications of good character are an important component in the loan approval process. In addition to community and personal opinions, credit history is an important indicator of whether or not a bank can rely on a party to honor their obligations to the bank.

In the end, it’s pretty simple: Banks lend money to organizations and people who show the greatest likelihood of repaying them. The above factors are not all inclusive in helping a bank make the correct decision to approve a bank loan, but they are certainly some of the most important.

For more information about bank loan approval, call (602) 445-6531 or visit biltmorebankaz.com.


Lending Thaw

Small Businesses Are Still Waiting For Bank Lending To Thaw

We are still feeling the effects of the recession that started in fall 2007. When small business owners read financial literature, listen to pundits on television or radio, or visit with their local bankers, they still encounter conflicting information regarding the near- and long-term prospects of both the Arizona and United States economies.

Small business lending
The most common form of bank loan for small businesses is a so-called working capital loan, collateralized by accounts receivables. One issue that’s uppermost in the minds of small business owners is whether banks are still making these working capital loans. The answer is yes, but specifically to new customers. Remember, banks do not make money unless they lend money. However, in times of economic uncertainty, banks want to be prudent and avoid any potential future losses, specifically after 2007 and 2008. Banks cannot afford to lose the principal of a loan.

For example, if a banker is asked to write a $200,000 loan at a 7 percent interest rate with a three-year term, then the banker will receive approximately $22,000 in interest payments (profit) and the return of principal. If the loan goes bad, the banker not only loses the $22,000 of potential profit, but more significantly, also the $200,000 in principal. Bankers will tell you they have to be right 999 times out of 1,000 in their underwriting efforts to stay in business.

Insurance companies, mortgage companies and banks all have underwriters to evaluate risk. In most cases, the banks also employ economists to evaluate the local and national economies and set standards for the acceptance of loan proposals. In other words, it may not be your branch manager telling the borrower “no.” The loan officer’s hands may be tied by the corporate economist who does not think the recession is over, believes things will remain difficult and sees that the probability for future bankruptcies still exists — therefore, no lending activity.

The major fly in the ointment is, pure and simple, jobs. Jobs, employment and unemployment numbers tell the story. In October 2008, one year into the recession, unemployment in Arizona was at 6.2 percent. By October 2009, unemployment in Arizona was up to 9.1 percent. Two years ago, October 2007, unemployment in Arizona was just 3.9 percent.

So, if the underwriter here at your local bank, acting on guidance or instructions from the bank headquarters, says “no” to a loan application, that decision may be based on the feeling that the local economy is not improving, that there may be future layoffs, etc. Therefore, the probability that your loan may not be repaid is high, so no loan.

Local and regional banks
So, do small businesses have a better chance of obtaining a loan or a line of credit from local or regional banks than they do from the national behemoths? Small, local banks do have more freedom in underwriting and risk analysis than the larger national banks. This is true. Smaller banks also will syndicate loans with larger banks, with the local bank being the lead lender. However, while the federal government guarantees Small Business Administration loans, the loan itself still must go through the risk analysis process in order to be approved. The risk analysis still is based on changing national and local economic indicators. These indicators have been improving for six months, but very slowly and at small increments.

That said, what are the arguments for the borrowers? The federal funds rate set by the Federal Reserve was recently at .25 percent, practically an all-time low. The source of capital to banks, the Federal Reserve and corresponding Federal Reserve banks, is essentially free to the banks. Currently, the banks are sitting on $823 billion of reserve capital available for lending. This is compared to $2.4 billion a year ago. As a point of reference, the March federal stimulus bill was $790 billion. The banks have more capital than the total dollar amount of the stimulus bill.

Banks are sitting on that $823 billion because they say charge-offs — bad loans and debts — are at a point not seen since the Great Depression. The banks cite $116 billion in charge-offs year-to-date, or a 2.9 percent charge-off rate that increased to 3.4 percent in the third quarter of 2009. Banks cannot endure charge-offs. Charge-offs have put more than 100 banks out of business this year. Therefore, banks are sitting on their reserve capital in anticipation of more costly charge-offs. However, bottom line, the banks do have the capital to lend.

Banks do not make any money sitting on $800 billion. To make money, they must lend money. Eventually, and sooner rather than later, the banks have to start lending again. But the $64 or $64 billion questions are: Is this turnaround self-sustaining? Will it continue in 2010? Will the turnaround in the economy create a sufficient number of jobs to sustain the economic growth in 2010?

Until banks loosen their grip, small businesses do have options in obtaining money to keep their businesses not just going, but also growing.

Small business can look to leasing alternatives and trade credit from suppliers to replace the financing they would normally receive from banks. Flooring (inventory) financing, commercial credit from companies such CIT, factoring of invoices, trade, or vendor credit from suppliers all can be sources of alternative financing for small businesses.

Businesses also have reduced the levels of required financing by laying off employees, reducing salaries, cutting fixed costs, reducing profit margins — anything and everything possible to stay in business until the economic cycle turns positive.

Let’s hope the federal government’s stimulus bill and the excess in bank capital will prove sufficient to generate economic growth going forward, and open up the traditional institutional financing necessary for small business development and growth. It is time that small business owners catch a break.

George Olander, Ph.D., is a finance lecturer at the W. P. Carey School of Business at Arizona State University

money pile

Raising Capital In A Financial Drought Is Tough, But Not Impossible

In today’s turbulent economic environment, many companies are finding their cash flows temporarily reduced due to difficult business conditions. Less cash flow generated from operations can cause a working capital squeeze or make existing lenders uncomfortable and/or uncooperative, particularly if the company has violated a loan covenant or agreement. In the past year, we have witnessed a dramatic pullback on the part of all lenders, especially banks. If a bank has the power in its relationship with a borrower due to a broken agreement or covenant, a company could find itself in real trouble unless it is able to raise capital from another source.

What types of capital are currently available?
The answers vary based on the company’s size (revenue, profits, assets, etc.), history of financial results, strength of its management team, and industry.

In general, there is debt and equity (i.e., stock), but capital should be considered on a spectrum from senior to junior. The most senior capital is typically a bank loan secured by a first lien on all the assets of a company, followed by second lien debt and then unsecured debt. As a general rule, the more junior the capital, the riskier and more expensive it is.

No matter the interest rate, senior debt will be cheaper than other capital. In the current market, cash flow-based senior lending has all but dried up. It seems that cash flow senior loans are available only to those companies with strong cash flows — in other words, those that don’t really need the money. On the other hand, if a company has significant assets and is not already leveraged, the owners should check with their bankers; interest rates may be higher and advance rates lower, but senior debt may be available.

Let’s assume bank debt is not available — that leaves equity (common and preferred stock) and subordinated debt (sometimes called mezzanine debt because it comes between senior debt and equity in the capital structure). It will be least expensive if owners are able to access friends and family as investors. That said, many entrepreneurs prefer to keep business and family separate, so that leaves high net worth individuals (angel investors) and institutional investors.

How can business owners prepare to raise capital?
Regardless of the type and source of capital a company chooses to pursue, there are several steps to take to ensure the capital-raising process runs smoothly and, more importantly, maximizes the chances for success.

Prepare an executive summary of the business. Describe the company and how it makes money, be sure to discuss products and services and talk about the company’s challenges and opportunities. Also provide biographies of key members of the management team. Use charts and graphs to make strong points about financial performance and industry dynamics.

Assemble a historical financial information package. Include at least three full years of historical financial statements. Audited financial statements are best, but statements reviewed or compiled by a recognized accounting firm likely will suffice. Also, include monthly financial statements for the last fiscal year and the year-to-date period. It is helpful to include information such as sales and gross margin by customer and/or product to help investors consider concentration risk. In addition, provide a detailed breakdown of costs and expenses, including information regarding capital expenditures. Try to break down capex by expenses required to maintain the business and those that contributed to growth.

Assemble a financial planning package. Include the current-year budget and a forecast for the coming year. A detailed bottom-up analysis is essential to creating credibility with investors. Future growth will be the decisive factor for equity investors. Include projections for the next five years if possible, even if they are just a best guess driven by top-line growth rates and margin assumptions; they will be helpful for investors who want to understand the potential of the business.

Select an online data room provider and begin uploading documents for investors to review. Be sure to include all key contracts, credit agreements, charter documents, board minutes, tax returns, etc. An online data room will streamline the due diligence process significantly, requiring less of the management team’s time and shortening the overall time to close.

Prepare a PowerPoint presentation that walks investors through the business, its historical results, challenges, opportunities and projections. Include details regarding the use of proceeds. Invite the most interested investors to visit the company and use this presentation as a basis for discussion.

Where do business owners go to find capital?

The best advice for owners and management teams is: Do not underestimate the time required and the complexities involved with undertaking a capital raise. Never be afraid to admit that you are in over your head and need the help of professional advisers. Investors, particularly institutional investors, are currently at an advantage. In today’s business environment, capital is scarce and at a premium. To get the best deal for your company you need to bring your A-Game and your A-Team. A variety of corporate and/or business advisers such as attorneys and accountants may be able to help business owners determine the best sources of capital and recommend an investment bank to assist with a more comprehensive review of capital-raising alternatives, as well as sources of potential capital. It could be the difference between using a watering can versus an industrial sprinkler when combating your company’s capital drought.