| Before lenders will grant a small business loan, they | | | | will include: |
| want to be sure that the loan will be repaid. Every loan | | | | Balance sheets, Profit and loss statements, and Cash |
| is a risk, but banks and brokers want to take as little | | | | flow projectionsfrom the last three years or for three |
| risk as possible. They look for businesses that show | | | | years' projections. |
| promise, and they award loans to businesses that | | | | Accounts receivable and payables agingbreaking your |
| have solid personal and business backgrounds and are | | | | receivables and payables into 30, 60, and 90-day |
| committed to the success of their businesses. | | | | categories. |
| What are the first things the lender will look at? The | | | | Market data showing demand for your type of |
| following are the five basic items that all lenders look | | | | business |
| at before they will approve your business loan: | | | | Research on competitors including their customer base |
| 1. Credit history One of the primary factors lenders | | | | and price points |
| look at is the condition of your personal and business | | | | 2. Loan request This can be included with the business |
| credit. This is generally reflected in your credit score | | | | plan and should detail the amount of money requested, |
| that is obtained from the three credit reporting | | | | how the loan funds will be used, the type of loan, the |
| agencies. Your personal credit score is associated | | | | amount of working capital you have, the collateral that |
| with your Social Security number, but business credit | | | | will secure the loan, the personal guarantees of the |
| reports are tied to your tax ID number. Before you | | | | loan, and how the loan will be repaid. |
| even start shopping for a loan, request a copy of your | | | | 3. Personal financial statements You will need to |
| credit report from all three major reporting agencies: | | | | provide personal financial statements for anyone who |
| Equifax, Experian, and TransUnion. Review it carefully | | | | owns 20 percent or more of the business. The |
| and correct any mistakes before you start the | | | | financial statements must include a complete schedule |
| application process. | | | | of assets, debts with balances due, payment |
| 2. Your investment Business loan applicants should | | | | schedules, maturity dates, and collateral used to secure |
| have a reasonable amount of their own money | | | | other loans. |
| invested in their business. Lenders want to know that | | | | 4. Other documents Lenders may also require articles |
| you will be motivated to work hard to make your | | | | of incorporation, taxpayer ID number, legal descriptions |
| business a success. When they see that you have | | | | of real property, leases, equipment inventories with |
| invested a substantial amount of your own money in | | | | serial numbers, proof of insurance for collateralized |
| your venture, they will assume that you will work hard | | | | items, and letters of intent showing that commercial |
| to make it a success. The amount of your required | | | | accounts intend to do business with you. |
| investment may vary, but it should be at least 20% of | | | | What is the loan process? Some lenders like to |
| the amount you need for the business venture. | | | | prequalify potential borrowers to determine how much |
| 3. Working capital Working capital consists of your | | | | they can afford. This also gives you and your lender |
| current assets minus your current liabilities. Working | | | | an opportunity to see which loan program would be |
| capital can also be thought of as cash on hand or | | | | most appropriate for your needs. After the lender |
| what is available to pay current debts and keep your | | | | gathers basic information and your application is |
| business running. A lack of adequate working capital | | | | received, a loan officer or processor will review your |
| increases the risk that your business will fail and | | | | credit reports, the amount of available collateral, and |
| makes lenders much less likely to approve your loan. | | | | your income. |
| 4. Ability to repay Banks want to see two sources of | | | | The loan officer will determine if any additional |
| repayment: cash flow from your business and a | | | | documentation is required. If you are purchasing real |
| secondary source which is typically collateral. Lenders | | | | estate, you may also need to submit preliminary |
| will look at your past and projected financial | | | | environmental reports, area maps, title reports, property |
| statements. They will want to see your personal | | | | appraisals, and lease summaries. Next, your |
| financial statements, personal tax returns for the past | | | | commercial loan package is submitted to the decision |
| two-three years, business financial statements for the | | | | makers -- either a loan committee or underwriter. |
| past three years or for three projected years, and | | | | During the underwriting process, you may need to |
| accounts receivables and payable aging. If your | | | | furnish additional documentation. |
| business has consistently made a profit or you can | | | | After the underwriting process, you will receive a letter |
| reasonably project a profit, you are more likely to get | | | | of intent or term sheet. A letter of intent or term sheet |
| approved. If your business has not been consistently | | | | is a formal document intended to put all parties (the |
| profitable, you can increase your chances of getting a | | | | lender and your company) on the same page. The |
| loan by including detailed information of new | | | | letter of intent will include the names of all parties, |
| opportunities, new contracts, or other information | | | | amount of financing, type of collateral, and other key |
| showing that your company's future will be profitable. | | | | terms. After all underwriting conditions are satisfied, the |
| Most lenders require collateral to secure the loan. | | | | final loan package is resubmitted to the loan committee |
| Collateral is required for all SBA loans. Collateral can | | | | for final approval. |
| be business assets and personal assets. If you plan to | | | | At this point, the lender will issue a final full loan |
| purchase equipment and other assets with borrowed | | | | commitment. If your loan is approved, you will receive |
| funds, these assets will be used as collateral for the | | | | closing documents and they may be handled by a title |
| loan. Lenders will also require you to personally | | | | company. The title company will record deeds and |
| guarantee the loan. | | | | mortgages, order title insurance, coordinate the |
| 5. Experience and character Lenders will expect you | | | | exchange of funds, and arrange for you to sign the |
| to have experience in the type of business that you | | | | loan documents. At the closing, the lender funds the |
| plan to run. If you do not have that experience, lenders | | | | loan with a cashier's check, draft, or electronic wire |
| will expect you to hire people who have experience. | | | | transfer. |
| Even if you do not have experience in this type of | | | | Being prepared and organized can save time and help |
| business, you should at least be able to show | | | | your loan get approved. Be prepared to have all |
| experience in other businesses and managerial | | | | required information ready to submit if your lender |
| experience. | | | | requests it. |
| What documents will lenders require? In order to | | | | Jo Ann Joy, Esq., MBA, CEO |
| expedite the process, the following four documents | | | | The future of your business starts here! |
| should be available for the lender to review: | | | | You may contact Jo Ann by phone at (602) 663-7007, |
| 1. Business plan A business plan is particularly important | | | | by fax at (602) 324-7582, by email at joannjoy@Indigo |
| for new businesses, as they lack a track record for | | | | Business Solutions.net, and by mail at 2313 East Ocotillo |
| lenders to review. Your plan should convey all | | | | Rd., Phoenix, AZ 85016. I have many published articles, |
| important facts about your business in a concise | | | | and I will send any article to you free of charge. Most |
| manner. A professional business plan will be at least 20 | | | | consultations are free. |
| pages long, plus financial projections. The business plan | | | | |