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How To Obtain a Commercial Loan
Hundreds of companies with annual revenues of less than $10 million are generating jobs for skilled workers and boosting business-to-business activity.
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Business New Haven
11/22/1999
By: Lori Green
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Small business is the fastest-growing market for the state's commercial banks, many of which are bigger and hungrier for customers than ever. While bankers are hardly a complacent lot by nature, most are buoyed recently by the dynamic regional and national economy. The sense that prosperity is there for the taking is heating up competition among lenders for qualified small-business borrowers and depositors.
After all, it's small business that's driving economic growth. Hundreds of companies with annual revenues of less than $10 million are generating jobs for skilled workers and boosting business-to-business activity. For small-business owners, securing credit isn't the high hurdle it used to be.
For one thing, today the process is a bit simpler - and faster. Loan applications at many financial institutions have been streamlined and are less onerous than ever to complete. Evaluating applications takes less time, but that doesn't mean any loans are being handed over without in-depth scrutiny of the creditworthiness of you and your business.
Increasingly, determinations are made using a wider lens. It's not that bankers are less risk-averse; it's more that history has shown that huge success often first comes wrapped in small packages. Commercial bankers now realize that they need to approach small business applications a little bit differently.
How do you know if your business will succeed in getting a loan approved? An important factor to loan officers is the personal commitment of the small-business borrower.
Lenders place a premium on a borrower's dedication to his or her business as reflected in a sound growth plan. While not every bank requires that existing loan applicants submit a formal business plan, financial projections and assumptions are key indicators for evaluating a company's future performance. If your business is a start-up, however, a complete business plan with at least two fiscal year's financial projections and assumptions is a must.
As a business owner, you need to build confidence in prospective creditors. They must believe that you are willing to exert yourself - and to be as innovative as it takes - to make your company succeed. For example, your plan for how the borrowed funds will be used should be realistic and take into account all business and personal costs that need to be met during the term of the loan.
Past credit problems do not necessarily present an insurmountable obstacle to obtaining a loan. In general, lenders today will look to see if you have been successful at managing your finances in a responsible manner over the past five to seven years. Your ability and commitment to repaying debt on time is one of the key issues that the bank considers in making the decision to extend credit.
Here is a sample of what is typically required by bankers for a loan of more than $25,000:
• Company background information, including top five suppliers and top five customers. This usually involves a short overview of the history of your business and growth strategy up to the present day.
• Principal(s) background information. Credit history is what banks are looking for most here, but management experience counts, too.
• Interim financial statements, if more than six months have passed since the fiscal year ended. Pro formas that your accountant will be able to pull together fairly quickly.
• Accounts receivable and accounts payable aging schedules as of the fiscal year-end date and the most recent month-end. Include the account name and the amount owed for each 30-day period.
One of the best ways to position your company for a successful loan application is to establish a relationship of trust with the bank you use for daily deposits and transactions. Being a known commodity to a bank - even if you haven't borrowed funds there before - is a plus when your loan application is reviewed. If your business and checking accounts demonstrate that healthy balances are maintained with overdrafts rare or nonexistent, your case for obtaining commercial credit gets a lot easier to argue.
Of course, each loan scenario is different, and bankers are quick to point out that they are not bound by a set of rigid criteria in evaluating applications. But remember: Although a lender may survey the big picture of your business, she'll never take her eye off the numbers.
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