It becomes very hard to secure small business financing. Banks and lending institutions can be rigorous in their lending review practices. Businesses owners may not be able to provide business loan and other may not be able to provide the reassurance. Lenders seek to alleviate their concerns that if business may fail and the loan won’t get repaid. When you approach a lender, it is important to understand the basis on which loans are made as it is to stack up financials and business plan.
You can also go through 5 myths about business loans
What lenders need to provide you a Business Loan?
Here are few things the lender will ask when you need a business loan. Before applying for a business loan it will be preferable to check the overview of the business loan.
- The vast majority of commercial loan applications require a business plan document.
- Banks want that standard summary of the
- Team, and
Complete details on Accounts Receivable
- Complete details on accounts receivable includes
- Account-by-account information (for checking their credit), and
- Sales and payment history
Complete details on Accounts Payable
- By complete details means most of the same information as for Accounts Receivable and,
- Credit references companies that sell to your business on account that can vouch for your payment behavior.
Personal and financial details
- Personal and financial details include
- Social security numbers
- Net worth
- Details on assets, and
- Liabilities such as
- Investment accounts
- Credit card accounts
- Auto loans
- Mortgages etc.
- The bank will take financial statements from all of the owners of the business consist multiple owners.
- It is about reducing the risks. Banks will often ask newer businesses that depend on the key founders to take out insurance against the deaths of one or more of the founders.
- Fine print can direct the payout on death to go to the bank first, to pay off the loan.
Agreement on future ratios
- Most of the commercial loan includes loan covenants, in which the company agrees to keep some key ratios such as:
- Quick ratio,
- Current ratio,
- Debt to equity
- For example: Within certain defined limits. If the financials fall below those specific levels in the future, then you are technically in default of the loan.
To sum up
The most basic and necessary characteristics are that the lenders will include. There are Five Keys to Loan Applications:
- Credit history
- Cash flow history and projections for the business
- Collateral available to secure the loan
- Myriad pieces of loan documentation that includes
- Business and personal financial statements
- Income tax returns
- A business plan, and
- Provides evidence for the first four items listed