The ability to obtain capital for your business before you need it is important
One of the major causes of businesses failing is the lack or capital to keep their business running. Although many businesses are started by using the founder’s personal savings or their friends and family networks in order to grow or expand there are times when looking to a bank is a must. Here are a few times during a business owner’s journey where they may need to look to take out a loan: starting up and purchasing equipment, purchasing real estate for their business, growing, and expanding by adding employees. Banks prefer to lend to companies before they desperately need the capital, therefore, it makes sense to have your business prepared to take out a loan or get approved for a loan before you may need it. Before you have the conversation with your bank, or several banks, it is important to evaluate the different nonprofit and government agencies that are available in assisting you with getting a loan. The agencies that can work on your before when getting are loan are U.S. Small Business Administration, Chamber of Commerce, Small Business Development Center, and a few others. These are not lending institutions themselves, but they will partner with lenders, and they will know who is aggressively lending to small businesses in your area. One of the major benefits of working with the Small Business Administration is they can guarantee your loan, in place of you having to personally guarantee the loan.
Factors used by banks to consider loans
The application process will vary from bank to bank depending on what their standards are and the size of the loan being requested. Most banks will have a streamlined automated process for loans that are below $100,000 and if the loans requested are higher the bank will use more scrutiny when considering approval. Credit scoring and credit reports are heavily relied upon for both the owners and the business itself. The banks will also be looking for strong cash flow numbers. Most conservative banks will want to see 3 years historical information business operating tax returns and 3 years personal tax returns for any principal owner. For businesses that have been operating for less than 3 years banks will considering lending if they are backed by an SBA guarantee.
Required Documents to Apply for a loan
- Business tax returns for most recent 3-year period
- Personal tax returns of all principal owners for most recent 3 years
- Fiscal yearend businesses financial statements for most recent period
- Interim financial statements since most recent fiscal year-end
- Personal financial statement of principal owners
- Liquid asset verification and debt schedules for the business and principal ownrs
- A current year budget projection
Here are some of the factors the bank will consider when granting approval for your loan. The first is the amount and stability of historical cash flow. The second is the amount of debt and equity and available collateral for the loan. Lastly, the bank will look at the liquidity and financial strength of the principal owners of the business who guarantee the loan. Future cash flow is how the bank is expecting the owners to pay the loan back, therefore, this will be looked at strongly for considering approval. Also, when considering debt-to-equity equity should be a minimum 20% to debt to obtain approval. Lastly, if the business were to default the bank wants to know that they can go after the owner’s personally for collateral to get their money back.
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