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    Essential Steps to Take When Applying for a Business Loan

    Posted by Sylvia Lagerquist, CPA

    Essential Steps to Take When Applying for a Business Loan

    Applying for a business loan or line of credit is one of the most critical steps in the life of your business. It is essential not only that you apply when you need financing, but that you prepare carefully so that you’ll not only be approved – but that you’ll secure the loan, terms and relationship you need with the bank you choose.

    Here are five essential steps you should take to be prepared for success when applying for a business loan:

    1. Build relationships with bankers.

    Today, the bank you choose for your business might be adequate to meet your needs. After all, they have many branches, pretty reasonable banking hours, and a strong network of ATMs.

    Tomorrow, that same bank could be a problem. If your business grows into a new state or region, will your bank have locations in that market? If your business is in manufacturing or retail, will your bank’s loan officers understand how financing works in your specific industry?

    Because the banking needs of your business can change dramatically, it’s imperative that you develop relationships with bankers today. Don’t just build relationships with the bankers at your current bank (although many business owners don’t even have relationships with their current bank!), but get to know business bankers and commercial loan officers at a variety of banks.

    2. Get to know your banking options.

    Financial services today can be provided by a wide variety of institutions. National banks provide the widest networks and the strongest financial resources. Community banks are more focused on specific regions and may have deeper connections and relationships in your area.

    Niche banks (like those that specialize in business banking or in international banking) may be best suited to meet unique requirements. And credit unions – once limited by regulation to stay away from the commercial market – are now a viable, competitive and mainstream option your business might consider.

    3. Understand who makes decisions (and how long they take).

    In each kind of bank, different people make lending decisions — and different processes lead to those decisions. A small, local bank may be able to authorize the business banker you just had lunch with to personally review and approve your loan inside of a week.

    A larger bank might give little to no authority to that same individual, instead requiring your application to be fed ‘upstream’ through multiple layers of review. Still other banks and credit unions might forward your application to a loan review committee that only meets periodically. The who and how of lending decisions is essential to understand up-front.

    4. Know what banks want from you.

    In short, they want everything. First, they will want to capture your existing accounts, both to give themselves greater security and to increase the financial benefit to them from doing business with you. Then, they will want financial statements.

    In most cases, they will also want personal financial details on the business owner(s). Then, they will want details on all of your assets, insurance policies, and copies of recent tax returns. They will also review your business credit report.

    Finally, they will want two things you may be very loathe to give them: (a) collateral (often in the form of a personal guarantee like home equity) and (b) mandatory agreements on key ratios you will be required to maintain (such as your quick ratio, current ratio or debt-to-equity ratio) as well as on the frequency with which you may have to submit periodic financial reports to the bank.

    5. Prepare ahead with your accountant.

    Considering the ride you are in for (as noted above), you need to start a discussion with your accountant – today. Well before you decide to seek business financing, you should be working with your CPA to ensure that your books are in order, tax returns are all filed, business ratios are healthy, and cash flow is solid.

    Perform a ‘what-if’ analysis with your CPA and let them help you build a strong foundation for a complete business plan, as well as a solid business case for the loan(s) you will request.

    6. Consider alternative financing options.

    There are many ways to secure the financing your business needs, and traditional commercial loans are just one of those options.

    One solution that may be beneficial for short-term cash flow financing in businesses with long collection cycles is invoice factoring, in which you sell your accounts receivable for immediate cash. The factoring company proceeds to focus on collecting the full amount of the accounts receivable and you move on with less than 100% of the accounts receivable value, but with cash in-hand today.

    Another option is federal, state and local economic development loans. In addition to traditional SBA small-business financing, you should also consider programs such as SBA 504 (for real estate and equipment), USDA Business & Industry (B&I) loan guarantees, federal EDA loans, small business loans from Community Development Finance Institutions (CDFIs), and state/local financing from your regional and community economic development authorities.

    Even if you proceed to apply for traditional bank financing, you can combine a bank loan with these other options and reduce both your ‘ask’ and your risk exposure to one lender, by diversifying your financing sources.

    7. Take baby steps with your bank, starting today.

    Do you use your bank’s business credit card program? Have you established a small line-of-credit? Are you keeping a reasonable level of funds in your bank account at all times? In short, are you using the services and resources of your current bank consistently?

    Doing so helps you build a business credit record, which is important to the journey as you and your business grow. Stay on top of new offers and programs that your bank rolls out, and  — where relevant — use them to build your business banking partnership.

    By taking these seven steps, you will be ideally prepared to create strong relationships, select the best bank for your business, and apply successfully for financing that is ideally suited for your needs — for today, and as you continue to grow for tomorrow.

    Image Credit: Alex (Flickr @ Creative Commons)

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