Absolutely, one of the worst life experiences is when you get the news that your business loan request has been denied.
After putting in all the work and investment of time to gather documents, talk to the banker on more than one occasion, and even projecting business decisions based on the receipt and implementation of the loans funds, you are given a denial for reasons that you cannot believe let alone understand.
Here are some of the best ways to help you get a business loan easily and comfortably:
Why Do You Need a Business Loan?
Bankers are trained to get to the “root” or reasons for the financing. Bankers intuitively ask themselves the following questions when assessing your business loan request, so you’d best be prepared:
- What is the purpose of the loan request?
- Why does the client need the credit facility?
- What is the repayment source of the loan? And…
- What collateral is the loan applicant proposing?
Now, let’s get back to you, the business owner. Before diving head first into the bank financing fiasco, ask yourself… do you REALLY know and understand why you need bank financing? That’s step one. Lets move on.
Understand the Credit Policy of the Bank
All banks have what is called a CREDIT POLICY (don’t let them fool you into thinking they don’t) .
Basically, a bank’s credit policy is considered the boundaries in which the banker can make loans and not get into trouble in terms of financing your business. Bankers are given a short leash in which they can solicit business loan requests and this is dictated by the bank’s credit policy.
So, what does this mean for you as a business owner? For now, I say that before making a request for a business loan, you must do some due diligence on the banks you will look to do business with and start with knowing and understanding their credit policy.
Have a Well Designed Executive Summary
The Executive Summary includes a description of your business loan request and also includes two very important pieces of information:
- How you will utilize the funds requested upon receipt (i.e. Use of Funds Explanation) and…
- When and how the funds will be repaid (i.e. Source of Repayment)
Please do not glaze over the Executive Summary because it’s here that the banker will set their frame of reference for the remainder of the analysis of your business loan opportunity.
Personal Financial Statement
The “PFS” is pretty simple: The bankers are looking to assess your personal finances to see if you practice what you preach. In other words, do the financial profiles of the business and the business owner correlate?
Although the business may be able to stand on its own in terms of not requiring the personal guarantee of the business owner (i.e. I highly doubt this especially if the business does not have robust free cash flow), bankers understandably want to see how prudent business owners are concerning their personal finances.
Remove all Ambiguities From Your Tax Returns
Tax returns are a banker’s way to analyze the “real” numbers since most, if not all, business loan request includes financials that are presented on the accrual basis of accounting (i.e. transaction are recorded when they occur) instead of the cash basis (i.e. transactions are recorded when cash is involved).
Tax returns tell the true income story in terms of how much the business owner is making to how much the business is really generating in terms of sales and profits.
Business Plan Briefing
The inclusion of this business plan briefing is to present a credible image of a healthy business that can repay a business loan. It’s recommended that you include the following content in your three to five page business plan brief in the loan package.
Business structure, short and long term objectives, personnel analysis (production, sales and marketing, administrative), insurance coverage, facilities, business risk analysis, products / services provided, and marketing plan are to be included.
Business loans are a natural part of any business’ strategic plans. Whether expanding operations, acquiring additional businesses, or restructuring business structure, business loans are another option for business owners to accomplish various goals.
Before making application for a business loan, business owners are recommended to equip themselves with the adequate knowledge and understanding in order to communicate clearly and effectively with the banker.