Key elements to getting a business loan

June 21st, 2013 Patrick Van Nevel

Obtaining the properly structured commercial loan can have a powerful impact on your business. It can improve your cash flow, help you invest in new employees, purchase new equipment, expand your office space and much more.  The bottom line? A commercial loan can help your bottom line.

It’s important to know how to plan for a commercial loan, and how to prepare and work together with a lender towards arranging a proper credit structure. Here are some key elements that can help you.

1. Provide good financial records and budgeting information.

One of the most important things is to have your company’s financial records for your lender to review.  Records you should provide to your loan officer are:

  • Balance sheet, including assets and liabilities
  • Profit and loss statement
  • Accounts receivable/accounts payable details
  • Two years of tax returns

2. Help the lender understand your business.

There’s a big advantage to making sure your lender understands your business. The more they understand your business, the more they have the insight and knowledge to recommend the proper loan for your company.  Discuss your market and market trends, your product, your competition.  Your awareness of your competitive advantages and how you will mitigate any challenges will help your lender understand your potential.

3. Explain to the lender the purpose of the loan and your repayment capacity.

Since a loan can be used for a variety of purchases and investments, it’s beneficial to give the lender specific details about what you’ll be using the loan for. Here are some typical loan purpose categories and the information you’ll want to provide:

  • Equipment purchase. The lender should be able to understand how the equipment will help you grow, gain efficiencies and be more successful. He or she will want the answers to questions like these:
    • Will the new equipment create additional jobs and revenue?
    • How long it will take for the equipment to pay for itself?
    • If there’s a new job that results out of the equipment, does the job revenue include the amortization of the new equipment?
    • If you’re replacing existing equipment, is the full cost or partial cost of the new equipment calculated into the job pricing?
  • Working capital. If you’re planning on using the loan for working capital, you’ll want to be able to answer the following questions to help your lender accurately analyze your situation.
    • If you’re buying inventory, what is the inventory turnover cycles, and what is the resale value of the inventory?
    • Does your existing inventory stay sellable or become obsolete?
    • Is your cash flow for paying salaries and overhead supported by account receivables?
    • How long does it typically take to convert your account receivables to cash?
  • Real estate. Many commercial loans are used to purchase real estate. If you’re planning on applying for a loan to purchase real estate, fund an office expansion, etc., your lender will want answers to these types of questions.
    • Is it a “limited use” type of building/office space/warehouse?
    • Is it cheaper for you to own it or lease it? (Leases do not require as much upfront capital.)
    • Is the property ready for you to move in immediately?
    • Will there need to be leasehold improvements (which may indicate an advantage of ownership versus lease)?
    • Is the location a good, valuable addition to your business?

4. Show your lender you provide additional business growth support.

Lenders feel more confident if they feel your business is well supported by your staff. It’s smart to share with your lender your management’s and key staff’s experience and qualifications. In addition, it makes sense to let the lender know the management’s succession plan, and the details about buy-out – is it formalized and funded?

5. Let your lender know you run your business with common sense.

Common sense is a key element in how you guide your business. By convincing the lender you use common sense in credit decisions, cash flow, capital reserves and other financial choices, they’ll see your business in a much more positive light.

There are many other aspects of getting a commercial loan for your business, but these are the key elements and questions you’ll need to prepare for your lender. The more your lender knows your business and understands it, the more likely you’ll get a loan approved.

Patrick Van Nevel

About the author

Patrick Van Nevel is Market President at MidWestOne Bank.

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