It becomes very hard to secure small business financing and on top of that, if you are starting out or looking to grow, 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 that lenders seek to alleviate their concerns that your business may fail and the loan won’t get repaid. So when you approach a lender, it’s just as important to understand the basis on which loans are made as it is to stack up your financials and business plan.
Here are few Things the lender will ask when you need a Business Loan or the lenders will look for before giving a business loan:
- Business plan
You know that there are always exceptions, but the vast majority of commercial loan applications require a business plan document Nowadays it can be short—perhaps even a lean business plan—but banks still want that standard summary of the company, product, market, team, and financials.
- Complete details on Accounts Receivable
That includes aging, account-by-account information (for checking their credit), and sales and payment history. (And if you don’t know what your Accounts Receivable are, then count your blessings. If you had any, you would eventually know.
- Complete details on Accounts Payable
By complete details means that it includes most of the same information as for Accounts Receivable and, in addition, they’ll want credit references, companies that sell to your business on account that can vouch for your payment behavior.
- All of your personal financial details
This includes social security numbers, net worth, details on assets and liabilities such as your home, vehicles, investment accounts, credit card accounts, auto loans, mortgages, and the whole thing.
The businesses which consist multiple owners, or partnerships, the bank will want financial statements from all of the owners who have significant shares which business consists of multiple owners, or partnership and yes, as I implied in the introduction to this article, that’s leading to the personal guarantee. Expect to sign a personal guarantee as part of the loan process.
- Insurance information
It is all about reducing the risks so 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.
- Copies of past returns
I think this is to prevent multiple sets of books—which I think would be fraud, by the way—but banks want to see the corporate tax returns.
- Agreement on future ratios
Most of the commercial loa includes loan covenants, in which the company agrees to keep some key ratios —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 most prospective lenders will concentrate on include. There are Five Keys of Loan Applications:
- your credit history
- your cash flow history and projections for the business
- your collateral available to secure the loan
- your character
- myriad pieces of loan documentation that includes business and personal financial statements, income tax returns, a business plan and that essentially sums up and provides evidence for the first four items listed
Do you know that this article Is a part of Top 5 benefits of business loans? You can also go through 5 myths about small business loans for central construction