Learning About Lending
Accurate financials, good credit and patience help smooth the loan process.

By Liston Rose

What is the process for obtaining a business loan from a bank? What documents should you bring when applying for a business loan? Knowing the answers will make you more comfortable with the loan process.

The Financial Documents
The first document to bring is your completed business loan application. The application outlines the loan request, identifies the borrower, lists the uses for the funds and shows the collateral.

A necessity for existing businesses is financial statements reflecting the past three years of operations. Many businesses rely on their tax returns to reflect business performance, but banks prefer to have accountant-prepared financial statements. The most commonly known accountant prepared statement is an audited statement. Audits leave few unanswered questions for the bank, but are costly for the borrower to provide.

Compilations, which answer some questions and are more accurate than tax returns in showing the worth of a business, are more commonly provided. However, there is still a significant cost to you.

In many cases, banks will accept financial statements prepared by the borrower, depending on the size and complexity of the loan request. The most important thing to remember is that the statement you provide must be accurate and supported by facts.

In most cases, each owner in the business will need to provide a personal financial statement along with two to three years of personal tax returns.

The individual statements list the personal (non-business) assets, liabilities and net worth of the respective owner, along with sources of income and personal debt payments. The bank also will order personal credit bureau reports. Before applying for a loan, review your personal credit report. This allows you to correct erroneous information, as well as identify derogatory statements you may need to have removed or amended to reflect your situation more accurately.

Business Plan
Business start-ups may have only one or two year’s worth of financials—or none at all—to submit. So you must submit a business plan, which outlines the owners’ abilities, market research, collateral, sources and uses of funds and projected performance.

In some cases, projections alone may be accepted, but you should also include the assumptions supporting those projections. As an added measure, identify sources of income that are not related to the business operations, which may be used to cover business obligations in the short term. A business plan or projections with assumptions may be required for existing businesses as well.

Additional documents to submit include resumes for all owners showing experience in the industry and/or experience and education in managing a business.

The Process
The first step in seeking a loan is to establish a relationship with a financial institution. You should know the type of loans and loan sizes the institution offers, and whether the bank makes loans in your chosen industry. Finally, you should know what expertise and programs the bank offers or participates in that might benefit your business.

Once you have selected the bank and submitted your request, the waiting begins.

First, the lender will see if there is sufficient cash to make the projected debt payments. This analysis will measure historic and projected business cash flow. Additionally, the lender will consider the net income available outside the business to cover obligations.

After the debt service analysis, the lender will analyze the collateral offered to secure the loan. The lender will determine the adequacy of the collateral by the type offered (i.e., cash, real estate, equipment, accounts receivables, etc.), relative to the type of loan structure requested.
Adequacy also includes the cushion provided by the value of the collateral relative to the requested loan amount and term.

Next, the lender will look at all the owners’ credit histories to determine the personal propensity to repay debt. Some lenders may use only the credit score, whereas others may analyze the entire report to mitigate derogatory statements in the report. At this point, the lender will decide whether to proceed with the request or deny it. If the decision is made to continue, the lender may have several questions about your request and may ask for additional supporting documentation.

After reviewing the answers to the questions posed and any additional documentation requested, the lender will decide whether to seek approval of your loan. Depending on the size of your loan request and the respective bank’s policy, the approval decision may be made by a loan officer, the bank’s loan committee or board of directors. The higher the approval authority, the more time it will take to obtain an approval.

Once approved, the lender will issue a commitment letter outlining the amount, terms and conditions of the loan. You will be required to sign and return the letter within a specific time period.

Long Story Short
The documents submitted must be accurate and complete. You should review all information for accuracy and reliability, as well as for signatures and dates. Depending on the loan size, complexity, questions and requests for additional documentation, approval may come in a few days or several weeks. Your lender should keep you apprised of the status of the request, but don’t expect daily updates. Respond to questions and/or requests for additional documentation expeditiously and accurately.

Liston Rose Jr., is a senior vice president and chief lending officer at Douglass National Bank.