By Rich Best

With the passage of the Small Business Lending Act, Congress has sent a strong signal that it wants to open up the lending spigot for small businesses. Even though banks are flush with cash to lend, the reverberations of the credit crisis have understandably led to a tightening of their lending practices. Banks want to lend, but for a small business that wants to borrow, it is more important than ever to have thorough documentation. To do this, there are five key documents that you’ll need when asking your bank for a loan.

Business Plan

The business plan is the most critical document that a bank considers for determining the loan-worthiness of a business. While credit-worthiness is a key factor, the bank needs to know that the business has the management capacity to repay based on a demonstrable and credible strategy for generating sufficient revenue.

The business plan should include a profile of the business that includes its mission, objectives, description of product or services, key people, customer profile and market focus, form of ownership, revenue history and any evidence of distinction.

In addition, be prepared to tell your story. Your loan officer will be interested to learn about your business and its prospects from your perspective – where the idea came from, what kinds of decisions you have made, how you navigated the economic downturn, etc. This is your opportunity to demonstrate your passion and build the case for your business as to why it is a good risk for the bank.

Marketing Plan

The bank will want to know what the business knows about its market and how it differentiates itself from its competitors. The stated demand for the company’s products or services must be supported with credible and current data. The plan needs to include specific strategies for building the brand, generating new customers and retaining current ones.

Loan Purpose

This document needs to include the contemplated amount of the loan and the specific funding purpose. The funding purpose should be detailed in its description of how the capital will be used to achieve the objectives or strategies outlined in the business plan. While the amount may be an estimate, the bank will want to see how the capital infusion will translate into an increased capacity to repay the loan.

Business and Personal Financial Statements

The business financial statement should include a three year balance sheet and profit-loss record. The balance sheet should provide details of assets such as equipment and real property. Cash flow projections should be based on a strict accounting of current receivables as well as intended customer receivables based on existing contracts. Some banks may require at least three years of tax returns as well.

The personal financial statement is equally weighted in the bank's consideration of the overall financial management capacity of the business. Also, because an owner may need to provide a personal guarantee of the loan, the financial condition and credit-worthiness of the owner is paramount in the loan decision.

Loan Guarantee

Some business lenders are hesitant to loan capital without some solid form of guarantee or collateral. Banks will look to the existing equity position of the business that includes equipment and property assets as collateral. They will also consider the owner's own equity position and his or her capacity to raise funds. All sources of collateral should be fully described in a loan guarantee statement.

Although these key documents comprise the critical foundation of the loan request package, it is not uncommon for the bank to ask for additional supporting documents. It’s also recommended that the loan package be professionally prepared along with a carefully orchestrated presentation. A business that knows how to present itself competently can more quickly earn the confidence of the bank lending officer.

A final note: You may want to consider seeking out a bank that is a preferred lender for the Small Business Administration. SBA loans are available to businesses that are deemed to have a profitable outlook and they may be used to cover the costs associated with business expansion. Loans are granted based on a string of criteria including credit standing, character of the owners, an assessment of the long-term business prospects and the loan purpose. A SBA-approved lender will usually have the mechanisms in place to help you navigate through the additional paperwork and SBA loan guarantee process.

 

Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites.


The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.