What steps do you need to take when applying for a small business bank loan? Like a good Boy Scout or Girl Scout, you need to “be prepared” well before you meet with a loan officer.
Make sure to go to a bank that fits your borrowing needs. For example, a large national bank might not be interested in making a $25,000 loan, but a community bank might. Some institutions also might have more experience with your particular industry.
Prepare Your Documentation
Start with developing a comprehensive business plan. Whether or not you decide to apply for an SBA loan, the government website provides a checklist of what to include in your plan: www.sba.gov/content/business-loan-application-checklist.
You’ll need to provide tax returns, financial statements, accounts payable and receivable, plus legal documents such as franchise agreements, leases and business licenses and registrations.
Showing your credit-worthiness is also essential, including:
DEBT-TO-WORTH RATIO This refers to all debt, existing and projected loans, compared to the equity of the company (its worth). Having “strong equity” assures the bank that you are fully committed to your business’s success.
EARNING REQUIREMENT Show that you will have sufficient cash flow to make your loan payments on time. If your business is already in operation, include historical data as well as monthly cash-flow projections for the first year of the loan. Some successful applicants provide three projections: worst case, expected returns and optimistic results.
POSITIVE WORKING CAPITAL This refers to current assets that exceed current liabilities, and helps demonstrate that you can meet your obligations. If your business is seasonal, you’ll need to show that you can pay short-term creditors in the off-season.
What Types of Collateral Are Acceptable?
Many budding entrepreneurs use their personal assets to guarantee a loan for their startup business. That’s a workable option, but you need to know what margin the bank will loan on the asset’s value. Typical margin values:
- Real estate: 75 percent of appraised value
- Inventory: 50 percent (Provide an inventory list.)
- Receivables: 70 to 75 percent (Provide an aging report for accounts less than 90 days old.)
- IRAs: Can’t be used as collateral
If you don’t have enough collateral, consider applying for an SBA loan, which is usually driven by cash flow rather than your asset base. Keep in mind that the SBA will still require personal guarantees from all business owners with 20 percent or more ownership.
To qualify, your small business must meet your industry’s size standard. The maximum tangible net worth of the business and its affiliates cannot be more than $15 million, and the average net income after federal income taxes (excluding carry-over losses) cannot exceed
$5 million for the previous two years.
Why Use a Preferred SBA Lender?
A preferred lender will keep up with changes that go into effect every year for the SBA loans.
Another benefit of working with a preferred lender is that the bank underwrites the completed loan package, and then ships it electronically to SBA for review prior to receiving funding approval. Approval can happen in three business days or less from the date of electronic submission. A non-preferred lender submission could take weeks for funding approval. (To find a preferred SBA lender in your area, visit tinyurl.com/preflen.)
By taking these steps, you’ll “be prepared” to “be approved” for your loan.