Small Business Foundations

Applying for Financing

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Applying for a Loan

Consider this!

A successful business can be measured by the motivation, desire, talent and time commitment of owners and employees!

Successfully obtaining bank financing is measured by how well you plan and execute the interview with your Banker!

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Applying for a Loan

What a potential borrower should know:

There are two types of financing: equity and debt financing.

You must consider your company's debt-to-equity ratio, which is the relation between dollars you‘re borrowing and dollars you‘re investing in your business. The more money you invest as an owner, the easier it is to attract financing.

If your company has a high proportion of debt to equity, experts advise that you should increase your ownership capital (equity investment) for additional funds. This way, you won't be over-leveraged to the point of jeopardizing your company's survival.

Additional equity often comes from non-professional investors such as friends, relatives, employees, customers, or industry colleagues.

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Applying for a Loan

What a potential borrower should know: (cont’d)

Whether you're starting a business or expanding one, sufficient ready capital is essential.

Avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money

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Applying for a Loan

What a potential borrower should do: Choose a Banker who has some knowledge of your

industry. Anticipate in-depth questions about your

company’s operation. Prepare a brief presentation about ownership

and/or management; recent developments in your business; future plans for expansion; as well as the impact any internal or external events (i.e. the

economy, technology, etc.) have had or will have on your business. (i.e. increase/decrease in sales, expenses, profits)

Be honest and forth right in your conversation. Point out the strengths and weaknesses of your company.

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Applying for a Loan

What a potential borrower should do: (cont’d) Discuss financing options/alternatives that will

accurately meet the current need(s) of your business.

Make sure the Banker in front of you can handle your loan request ($ amount and loan type).

Be clear about the use of the loan funds, and, if applicable, have items such as a bill of sale, a purchase and sale, accounts receivable aging, inventory and/or machinery & equipment listings at hand.

Let the Banker know what terms you are looking for and if they fit in the Bank’s lending guidelines. (Note: If purchasing equipment, inventory, or real estate, 100% financing is not an option. Borrowers should have 20% -30% available as their down payment or capital injection if request is for a start-up)

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Applying for a Loan

What a potential borrower should do: (cont’d) Discuss your current cash flow situation, to support

both the request and the terms you’re looking for. Have historical and interim financial information

available when you meet with a potential Banker. (note: provide both business and personal financial information)

If applicable, provide projections for future months and explain how they match up against current and/or historical financials.

Ask about the application process (i.e. approximate time

frame from submission→ decision→ closing). Ask about any government sponsored loan programs

that the bank participates in. (i.e. SBA)

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Applying for a Loan

Getting ready to submit the application: Before the application leaves your desk, review it with

the Banker. You and the Banker should agree that all financial

information, agings, and listings required are included in the package.

REMEMBER: A timely loan decision can only be reached if the Banker submits a ‘complete’ application package!

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Applying for a Loan

What to do if your business is a start-up: (less than 2 yrs old)

Have a solid business plan with projections (Note: it is advisable for start-up entities to work with agencies such a SCORE, Community Development Centers (CDC’s), Center for Women in Enterprise, etc,. to get assistance in developing a business plan).

Provide interim financial statements if your business has been in operation for 45 days or more.

Provide 2 years personal tax returns along with a personal financial statement. (note: use the bank’s personal financial statement form or one prepared by your accountant/CPA)

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Applying for a Loan

When reviewing a loan application, banks still look at:

The “5 C’s of Credit”

• Character• Collateral• Capacity• Conditions• Capital

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Applying for a Loan

Understanding the “5 C’s of Credit”:• Character

o Measures the integrity of the borrowero Analyzes past credit payment historyo Based largely on the business and personal credit

reports of the company and owner/guarantorso Analyzes the borrower’s credit with trade suppliers

other references o The character analysis aims to predict the likelihood

of timely loan repayment.

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Applying for a Loan

Understanding the “5 C’s of Credit”: (cont’d)

• Collateralo Collateral is what borrower “pledges” to secure

financingo Business and personal assets are evaluated to

determine sufficient coverage based on loan sizeo Collateral is considered a secondary source of

repayment in the event the business cash flow (net profit) fails to do so.

o Types of collateral includes: equipment, accounts receivable, real estate, vehicles, and inventory.

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Applying for a Loan

Understanding the “5 C’s of Credit”: (cont’d)

• Capacityo Capacity determines whether or not the customer has

the ability to repay a new loan and/or current debt obligations by testing the business’s liquidity and ‘cash flow’

o Capacity is considered the most important factor in a business credit decision

o Capacity involves the analysis of historical financial trends and ratios.

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Applying for a Loan

Understanding the “5 C’s of Credit”: (cont’d)

• Conditionso Assesses the borrower’s industry as well as the overall

economic conditions o A brief historical evaluation of the industry the borrower

is in is performedo A evaluation of the borrower’s ability and preparedness is

done to see if the company and its management is able to cope with changes in a changing economic environment.

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Applying for a Loan

Understanding the “5 C’s of Credit”: (cont’d)

• Capitalo Assesses the amount of money the owner(s) of the

has invested in the business.o An analysis of available sources of cash and other

personal assets outside of the business is completed

o The relationship between debt and equity in the business is measured.

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Remember Your Banker is a valuable resource

• Borrowers can and should consult with their Banker.• Your Banker can walk you through the application

process. Keep in Touch

When you develop a relationship with your Bank and Banker, it keeps them well informed about the growth and well being of your business.

When or if the company needs another loan, the process is smoother because of the relationship.

Applying for a Loan

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QUESTIONS

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