If you’re running a small business, it’s more likely than not that you’ll need a loan at some point, whether to make a major acquisition, expand operations, move your company forward in a new direction, purchase a subsidiary, or tide you through a rough period. Loans are standard in business, and building creditworthiness by taking out a loan and then keeping to the payment terms is one way of establishing your business.
However, applying for your first business loan can be a little intimidating; the commercial loan officer at your lending institution will require a lot of information, and it may not all reflect positively on your business. The important thing is, be completely forthright; don’t try to conceal or gloss over anything. The loan officer has various ways of finding out information about your company, and if he or she feels that you are trying to be deceptive, that’s a sure way to have your application rejected. If you have been delinquent with payments to vendors, for instance, it’s best to be precise and honest, and be ready to explain exactly why the irregularity occurred. If it was a matter of faulty procedure, or if you were just short on cash for a few months, have evidence showing that your situation has now improved.
Be prepared with documents, demonstrating both what the loan will be used for and why your company is a good credit risk. Most important is your business plan. Any start-up company needs a business plan, but if you’ve already been in business for a few years and need money for a specific purpose, then amend your existing business plan to incorporate your current situation. If you need the loan to make an acquisition or expand your operations, exactly how will the cash be used, and how long should it be before the expansion positively affects your bottom line? Be specific with numbers, and be prepared with best case/worst case scenarios. Your business plan should be a professional document; hire outside help to draft one for you if your expertise in this area is limited.
You should also prepare a cash flow projection. Do not confused this document with a cash flow statement; the latter is a record of cash movements that have occurred in the past. A loan officer will be more interested in a projection, as this anticipates how easily the loan will be paid off. Ideally, a cash flow projection should be a month-by-month accounting of anticipated cash movements into and out of your company for the following year.
Cash flow projections generally have three parts. First, enter estimated cash revenues, from sales for instance. Only enter revenues in cash for each month; don’t enter receivables. Second, enter cash disbursements, which you can copy over from your expense ledger. Finally, reconcile revenues and disbursements. This is just like balancing your checkbook: you begin with a carryover from the previous month, then add revenues and subtract disbursements, ending up with an adjusted cash flow balance that carries over to the next month.
If you are the business owner, you should also be prepared to show the loan officer a statement of your personal financial status: a list of your own assets and liabilities. Your personal financial status, of course, is entirely separate from the financial status of your company, but, particularly for very small companies, the loan officer will want to see as full a picture as possible. Very often, a business owner will use his or her own personal assets to start up a company, and if you can show that you still have personal assets in reserve that can be tapped in emergencies, that will make your application look more favorable.
Some lenders may wish to see business tax returns going back a few years. Tax returns can shed a different light on a company’s financial status. And a lender will want to see credit reports for both your business and, in many cases, yourself. Lending institutions can easily get these reports through the credit bureaus — Dun & Bradstreet, Experian, Equifax, and others for business credit reports; Experian, Equifax, and TransUnion for individual credit reports. However, you should check all of these reports thoroughly beforehand to ensure that they are correct and up-to-date. Get any errors corrected. If any errors remain in your credit report while it is being examined by a loan officer, have documentation showing why the report is in error, and that you have taken steps to have the report amended.
Finally, be ready to “sell” your idea — the reason you need the cash — when you are interviewed by the loan officer. Be ready to offer collateral — a tangible asset such as equipment, property, a vehicle — that can be sold for cash in the event of nonpayment. Be prepared to risk your personal wealth toward the venture; as pointed out above, bring a statement of your personal assets and liabilities. You are, after all, asking the bank to risk its money, so you should be willing to risk your own as collateral. And be prepared to sell yourself. The success of any business venture depends on the expertise of the professionals who are directing the effort. Be ready to talk about the details of your business, and how your own experience and expertise are the driving force behind your company’s success. Don’t boast or make exaggerated claims, but project confidence that you are the right person to make it work.
With the right documents, and the right attitude, securing a business loan can be easier than you think.
