How To Develop Loan Proposals and Applications… Addressing Most of The Critical Risks That Hold Back Banks From Releasing Funds To You!

Keeping a small business running with money drawn from your own pocket is nearly impossible these days. Whether it’s purchasing inventory, hiring new employees, or opening additional locations, any type of expansion requires extra working capital.

The fact that it’s becoming increasingly difficult for small business owners to secure funding through a bank makes it even more challenging.

Last week, we talked about Government Funding Opportunities For SMEs in Nigeria: How to Identify, Target and Apply for Government Funds To Start or Grow Your Business. If you missed that edition of the SuccessDigest Marketplace Advertisers’ Catalog click here to get it or, send us an email and we will send it to you.

However, we received a couple of emails within the week from our patrons – small business owners – who read our content on How To Raise Capital For Your Startup And Small Business Growth, they are interested in learning How To Develop Loan Proposals and Applications To Banks In A Way That Addresses Most Of The Critical Risks That Typically hold back banks from releasing funds to entrepreneurs. So that’s what we will be discussing today.

Banks are always ready and willing to give loans. They make money by lending money. If a bank doesn’t give out its money, it can’t make more money. But they just don’t lend money to anyone. So, if you are not getting the loan you requested from the bank, it’s because you haven’t met the requirements.

There are a variety of reasons why banks are declining your small business loan request.

Most banks are typically conservative and don’t want to lose their money. That’s why they only give money to people and businesses that meet their criteria.

To get a loan from a bank, you must understand how banking works and how to entice them to give you capital. And, in this article, we have outlined the most fundamental characteristics most banks will concentrate on:

1. Consistent Cash Flow

Banks tend to favour your Small Business if you have a steady revenue stream and consistent cash flow coming in every month. Small Businesses that can’t demonstrate this consistency are denied loans significantly more often than not.

The bank’s primary concern is whether your daily operations will generate enough cash to repay the loan. Cash flow shows how your major cash expenditures relate to your major cash sources. This information may give a lender insight into your business’s market demand, management competence, business cycles, and any significant changes in the business over time.

Because of the attention that cash flow receives, you may want to consider our suggestions for improving your positive cash flow; to increase your chances of getting a business loan. We suggest you review the following practices of your business:

Pay off, or delay paying a debt. If possible, pay off existing debt or refinance the debt for a longer maturity with lower payments. For other debts, try to renegotiate payment lengths. Believe it or not, some creditors may allow some delinquencies as long as some money is coming in. In some situations, you may simply have to prioritize those creditors who must be paid because they are providing necessities such as utilities, certain suppliers, payroll, etc., and try to delay payments to creditors who are less likely to halt your business – like secondary suppliers.

2. Sufficient Collateral

When it comes to obtaining a secured loan, providing collateral is a must. To a bank, collateral is simply defined as property that secures a loan or other debt, so that the Bank may seize that property if you fail to make proper payments on the loan.

For your Small Business, lack of sufficient collateral will exclude you from obtaining financing because loan applications usually include a request for a viable piece of collateral in order to complete the transaction and receive funding. That’s not a problem for large businesses that own property or other big-ticket assets, but it can be an insurmountable hurdle for Small Businesses.

When Banks demand collateral for a secured loan, they are seeking to minimize the risks of extending credit. In order to ensure that the particular collateral provides appropriate security, the Bank will want to match the type of collateral with the loan being made.

3. Debt-To-Income Ratio

Banks are wary of lending to businesses that have existing debt with other lenders. In many cases, they won’t even consider lending to a business that has already taken financing. Since many Small Business owners seek credit from multiple sources, especially during the start-up phase, this can be a major strike against them when applying for a loan or cash advance from a traditional bank.

Banks will usually request to see all of your business’s financial details. That includes all current and past loans and debts incurred, all bank accounts, investment accounts, credit card accounts, and of course, supporting information including tax ID numbers, addresses, and complete contact information and, in addition, they’ll want credit references, companies that sell to your business on account that can vouch for your payment behavior.

4. Customer Concentrations

Banks are often skeptical of businesses that report a significant bulk of their sales from only a select number of customers. Lenders, in general, like to see diversity in a business’s clientele as opposed to the same customers. For example, a local pub or restaurant that relies mainly on its “regulars” for steady income can present a perception problem with traditional banks.

5. Business Plan

There are exceptions, but the vast majority of viable loan applications require a business plan document. Nowadays it can be short, perhaps even a lean business plan, but banks still want that standard summary of the company, product, market, team, and financials.

6. Your Character As Potential Business Borrower

The weight given to a Bank’s assessment of a borrower’s character can vary tremendously between Banks. Many small businesses have found more success “selling” their reputation and good character to smaller community banks who may be more directly affected by the economic health of the surrounding community.

To ensure you’re selling yourself well to your Bank, consider some of these important steps to Improving Your Character in Front of Your Lender

As a general rule, there are common traits considered the most important when a bank considers your character:

Successful Prior Business Experience – An existing or past relationship with the Bank (e.g., prior credit or depositor relationship).

Referrals by respected community members – References from professionals (accountants, lawyers, business advisers) who have reviewed your proposals

Community Involvement – Evidence of your care and effort in the business planning process. Many banks consider the amount of investment the owners themselves are committing to the business as evidence of a borrower’s “character.” On top of that, many commercial lenders want the owner to finance between 25 – 50 percent of the projected cost of a startup business or new project. If your investment is considered insignificant, a lender may consider it a lack of both owner confidence and dedication to the business.

How To Prepare A Bank Loan Documentation

The process of applying for a loan involves the collection and submission of a large amount of documentation about your business and yourself. The documents required usually depends on the purpose of the loan, and whether your business is a startup or an already-existing company.

Documentation for Startups

A bank will typically request, at a minimum, the following documentation for a startup business:

–          A personal financial statement and personal federal income tax returns from the last one to three years

–          Projected startup cost estimates

–          Projected balance sheets and income statements for at least two years

–          Projected cash flow statement for at least the first 12 months

–          Evidence of ownership interests in assets, such as leases and contracts, and collateral

–          A business plan that includes a narrative explaining the specific use for the requested funds, how the money will assist the business and how the borrowed funds will be repaid (repayment sources and duration of repayment period), including identifying any assumptions used in developing your projected financial

–          A personal resume, or at least a written explanation of your relevant past business experience

–          Letters of reference recommending you as a reputable and reliable business person may also help your chances for a loan approval

Documentation for Existing Businesses

For an existing business, you can anticipate a request to produce:

–          Income statements and business balance sheets for the past three years

–          Projected balance sheets and income statements for two years

–          Projected cash flow statements for at least the next 12 months

–          Personal and business tax returns for the last three years

–          A business plan, depending on the credit history of your business and the purpose for the loan, may be unnecessary, and a brief narrative of your intentions may suffice

Other documentation requests to expect

Depending on the specific type of loan you are seeking, you should also address certain issues related to that loan type.

For instance, if money is requested for working capital, your documentation should include:

–          The amount that will be used for accounts payable, along with an accounts receivable aging report to disclose the current amounts overdue 30 to 60 days or older

–          The amounts that will be used for inventory and any increase in the number of days that inventory on hand will be held

–          The amount your cash balances will be increased

–          A contingency amount that is equal to at least 10 percent but preferably 25 percent.

Documentation for the acquisition of land financing should include the real estate’s cost, location and size, intended use, and whether any of the lands is for future expansion.

Banks often rely on reaching a personal “comfort level” with a borrower before making a loan. This comfort level is based on the degree of trust or confidence that the bank has in the accuracy of the information and documentation being presented.

If you’ve got a solid business plan, profit forecast, and estimated time to maturity, you would be able to raise money for your business with your local bank.

In our coming article on SuccessDigest Marketplace Advertisers’ Catalog, we will be discussing The Role of Partnership in Small Business Growth.

We invite your comments and questions on this topic and, if there are other topics that you would like us to discuss, kindly send them via email to [email protected] and we will treat them!