Ready to apply for a business loan?
As part of Webster Bank's Specialty Banking Team, I have the pleasure of working with a great mix of clients; some entrepreneurs are just starting out, while others are 'seasoned' borrowers. In any case, securing financing for your business start-up or expansion can be a time consuming, frustrating process. However, there are several things you can do before filling out an application to expedite the process:
Have a good business plan – There is an art to being thorough and concise at the same time. A good business plan will outline the business, the industry, the competitive landscape, and the business’ unique market differentiator. Additionally, the plan will demonstrate the ability to repay the debt requested. Be sure to illustrate how borrowing money will allow you to become more profitable.
Executive summary – The most effective business plans begin with a one page executive summary outlining your business, your reason for borrowing money, the amount requested, and how you intend to repay it. This gives the loan officer a broad overview of your organization before getting down to the nitty-gritty of the proposal. This is the first thing a loan officer will look at.
Convey your borrowing needs – In your business plan, be clear on how much money you are asking for, and exactly what you will do with the proceeds. Lenders need to determine collateral coverage and evaluate the risk of the proposal. In order to do that, they need to know how each dollar they are loaning is being used. When a loan officer asks, “How much money would you like to borrow?”, the worst possible answer is, “How much can I get?”
Realistic financial projections – A critical element of any good business plan is the financial projections. Hopefully, the debt you are seeking will allow you to generate increased revenue, and more importantly, profit. Incorporate the debt and expected revenue into your forecasted Balance Sheet, Income Statement, and Statement of Cash Flows. These statements need to be broken down monthly for three years.
Be thoughtful and measured, not overly optimistic. Of course you think your idea will be successful, so during the research process it’s only human to look for information that reinforces the belief you want to have. You will need to justify why you believe sales will increase at the rate you are forecasting, and if forecasted expenses are lower than current ones, a lender will scrutinize and potentially ‘re-adjust’ your forecast. To be on the safe side, estimate low sales and high expenses and make sure the forecast is still profitable. If you get assistance preparing these, be sure you can explain them to your lending institution. This is the second thing a loan officer will look at (even though it’s at the back of your business plan).
Provide tax returns – Existing businesses will need to provide their lender with three year’s tax returns (less if the business has not been open for three years). The bank will use these returns, in part, to determine the borrower’s ability to repay the debt being applied for. So, if your returns do not indicate profitability, you will need to make a strong case that the debt you are seeking will allow your organization to generate enough profit to repay the loan and be financially solvent. The most recent three year's personal tax returns are required, as well.
Check credit report – Obtain your credit report from one of the many free services available and review to make sure all items belong to you. If not, contact the credit agencies and begin the process of clearing it up. If you have any delinquent accounts, try to bring them current before applying for a loan. Tax liens, unpaid/delinquent child support and student loans make it very difficult to obtain new financing. Other concerns on your credit report may be explainable, and something that a lender can work with. Be sure to discuss them with your loan officer. If you don’t, your lender is left to draw his or her own conclusions, which will likely be less favorable than your explanation. Cleaning up your credit report may take time, and it might mean putting you request for financing on hold. If so, set a budget and timeline to get your finances back on track before applying for a loan.
Be prepared to contribute – Banks want to see that you have some of your own resources invested in the project. If you don’t have any resources to contribute, consult your loan officer to find out how much you will need. Then you can save the required money and apply at a later date. That said, starting a business without any reserve is a recipe for failure, so be sure not to deplete your liquid resources entirely. Don’t worry, lenders won’t want you to start a business without reserve funds either.
Fully complete the application – Banks will not process a loan application unless it is complete. Borrowers are naturally anxious for an approval, and can easily become frustrated when the process slows down. However, in many cases, the slowdown is the borrower’s fault, as they have not provided all of the required information.
Preparing all of this can be a daunting task, particularly if you do not have any experience doing so. Hence, the SBA has resource partners that provide no cost, confidential business counseling. They can help you put forward the best possible proposal, thus maximizing your chances of an approval. Contact your local Small Business Development Center, SCORE Chapter, or Women's Business Center to learn more.