What do lenders look for? How can I prepare in advance?|
As your business grows, so might your need for additional funding. Yet, are banks actually lending? And if they are, how do you get a business loan anyway?
Well, the good news is banks ARE lending. We’re going to breakdown how to prepare before going into the loan process and in general, explain the basics of what lenders like to see in a good loan candidate.
Going into the loan process, you want to have a few things already prepared:
Have a business plan (including a profit plan). The best way to get a loan is to have a solid plan for using the loan. A business plan can include the following:
- Executive Summary
- Market Analysis
- Company Description
- Organization and Management
- Marketing and Sales Management
- Service or Product Line
- Financial Projections
Your financial statements. One of the first items a lender will want to see is your financial statements. Not only do you need to provide accurate, current and historical statements, you need to know what your statements say about your business. Be prepared to discuss the details of your statements and explain any of the numbers.
- Business financial statements: Lenders generally want to review business financial statements from the past three years, as well as current statements.
- Personal financial statements: A personal financial statement shows your personal assets, liabilities and net worth.
- Personal and business tax returns: Lenders often ask for up to three years of past tax returns, both business and personal.
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Source and amount of equity contribution. Business loans usually require the business owner to contribute between 10 and 30 percent of total project costs in cash or equity. Include a write-up documenting the amount and source of your equity contribution.
Your credit report. You can get a free copy of your credit report from each of the three major credit bureaus every 12 months. Study your credit report, make sure it’s accurate, fix any inaccuracies and be prepared to explain any credit issues.
Collateral options. Be prepared to discuss collateral with lenders. When you are purchasing a fixed asset, the asset is often the collateral for the loan. Lines of credit are sometimes unsecured if a business owner can show a strong history of profitability, but it is not uncommon to use personal assets, such as your primary residence, to collateralize a business loans.
Having all of these items ready will allow a lender to respond to your loan application as quickly as possible.
So what’s next? How does a bank evaluate a loan application? In general, here’s what they look for:
Good credit score. Your credit report gives the history of how you have managed debt for the past seven years. A good credit score tells a lender that you have the ability to manage and repay a loan.
Equity contribution. Sufficient equity contribution shows that you have a commitment to the project and the ability to earn, save, and manage money.
Repayment ability. Lenders often analyze financial statements from the past three years to see if the business has the historic ability to pay debt service. Lender criteria vary, however, you will probably need to show that you have strong profits, good cash management skills, and growth potential. The need to show historical evidence is why it is harder for a start-up business to obtain a loan. On the other hand, while most loan applications require projections, it is more difficult to qualify for a loan on projections alone. Try a Loan Calculator>>
Loan-to-value ratio. Lenders tend to loan between 70 and 90 percent of the market value of an asset. If you are buying real estate, an appraisal will be used to determine the maximum loan amount.
Recognizing the right time to borrow money for your business isn’t always easy, but being prepared and knowing what to expect should make it just a little less daunting. And you don’t have to go it alone! A Business Banking Expert at American River Bank can help guide you through every step of the process.
This is not an offer or commitment to lend. Contact a Business Banking Expert at American River Bank for more information.
Information supplied within this article is provided by The Federal Deposit Insurance Corporation in Partnership with the U.S. Small Business Association.