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You have
probably read reams and reams of information about applying
for a commercial loan. There are books in every bookstore,
library and on the Internet about how to go out and get that
mystical business loan. Let me assure you, getting the loan
is in no way easy.
This column is not designed to
show you any tricks of the trade. Rather, there are certain
sets of documents you need to submit that impact the banker's
decision. Additionally, it is important that you understand
there are intangible issues impacting the loan officer's decision.
Let us first begin with a list
of documents. It is pretty common knowledge they will include
the following:
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A loan application
provided by the lending institution. Review a copy
of the SBA's 7a loan program application for a general
idea of what to expect on the form.
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A personal financial
statement from each ownership participant in the
company. Again, the SBA personal financial statement
form is a rather universal example.
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Documents confirming
the legal structure of the business enterprise.
Proprietors, having no corporate structure, can
assume the application is viewed as a personal loan.
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Signed approval for
the lender to access the personal credit history
of all company ownership.
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Company IRS returns
for the last 3 years
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Personal IRS returns
for the last 3 years.
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Certified copies of
company financial statements for the last three
years.
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Schedule of all outstanding
company indebtedness listing outstanding principal,
interest rate, monthly payment schedule and remaining
term.
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Copies of any rental
and/or lease agreements for real estate and equipment.
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Depreciation schedule
of all fixed tangible assets including original
value, depreciation formula implemented, useful
life and adjusted net value at the present time.
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Aging of accounts payable
and receivable.
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A business plan
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Most
interesting is that the shortest description of all 12 items
is the one that requires more work to prepare than all other
11 documents combined. The business plan should have well documented
market research regarding the product, target customers, target
geographic market, pricing policy, and a promotional strategy
designed to insure you can give customers a reason to consider
your product or service over the competition.
The capital investment in your
operation must be delicately balanced to insure you meet customer
demands. Invest too little and you may lose sales opportunities.
Invest too heavily and the actual sales may not be sufficient
to cover your expenses. It is important to note the list of
documents can vary from one lender to the next. Of course
there are certain items you cannot provide if you represent
a start-up venture. And, in that case, your business plan
becomes even more critical.
Now let us consider the intangible
items the banker has in mind. To begin there is you. And,
in the eyes of most every lender, if they are not impressed
with your ability to direct and insure the profitability of
your proposal, it won't matter how marketable your plan may
be. It's only as good as you.
Be certain to include the credentials
and experience of all owners and key personnel in the business
plan. If you and any key personnel have little or no experience
related to the product or service offered, your chances of
getting the loan are hindered.
One last, but very tangible item
is the amount of personal investment you and all other owners
will put into the proposal. Typically, if the company does
not finance 30% to 50% of the loan package many lenders simply
do not consider the application. There are exceptions, but
this is a typical investment ratio.
In the case of a start-up venture
many lenders expect you to defer personal compensation until
positive and cumulative cash flow occur sufficiently to insure
payment of all liabilities in a timely fashion and some accumulation
of cash on hand in the bank. In the eyes of the lender you
should be prepared to make a personal financial sacrifice
if it is necessary to prevent default on the loan.
There
is one concluding note on which I'll not mince words. Many
traditional commercial lenders do not like to finance start-ups.
Several bankers with whom I have associated have stated it
to me time and time again, off the record.
In that case you have to provide
all requested documentation, have an excellent personal credit
history, meet or exceed the lender's expectations of personal
investment in the start-up, have education and/or experience
which insures your command of the product or service offered,
be prepared to defer personal compensation, have a financially
sound personal financial statement, and be prepared to waive
protection of personal assets, even if the loan includes the
purchase of fixed assets for collateral.
Applying for a loan is demanding.
Securing the loan is much more difficult. But know what the
banker expects, deliver it when asked and you won't be guilty
of failing to be prepared.
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