Applying for a bank loan can be frustrating and difficult at times for business owners. Understanding what bankers are looking for can help improve your chances of getting a loan.
Your job as the borrower is to provide information that makes the banker feel safe. Start with a financing proposal, which should include a statement of what you need, why you need it and how you plan on paying it back. The documentation should include the last three years of tax returns on the business and the most recent balance sheet and income statement. The owners should provide their last 3 years personal tax returns along with a personal financial statement that discloses their assets, liabilities and net worth. If it’s a new venture, your projections and a business plan will be essential.
Bankers are looking at the “5 C’s of Credit when reviewing a financing proposal
The judgment on the character of an individual is primarily based on past performance. One’s credit history with the bank and with others is very important; it provides the banker with an opinion as to whether or not you are trustworthy to repay the loan.
The banker wants to be able to prove that you can pay the loan back. Therefore, the banker will review the business’ cash flow. Payment history on existing credit relationships, both business and personal, will be reviewed and considered an indicator of future payment performance.
This is a secondary source of loan repayment and will come into play when the first source of loan repayment “operating profits” is no longer available. Bankers are looking for business and personal assets that can be converted to cash in case some happens with the business. This could take the form of real estate, equipment, investment accounts, account receivable, inventory or other items.
This is the amount of money the owners have invested in the business and an indication of how much the owners have at stake should the business fail. Bankers will expect the owners to have contributed from their own assets and to have undertaken personal financial risk to establish the business before asking the bank to commit any funding.
The banker will consider the local and national economic climate, and conditions both within your industry and in other industries that could affect your business. If the bank believes a depression is coming, it won’t extend credit easily.
Here are the most common reasons why bankers decline a loan.
- Poor earnings record
- Low quality collateral
- Slow/past due trade or loan payment record
- Start-up or new company
- Too little owner’s equity
- Questionable management