Approval of your loan request depends on how well you present yourself, your business, and your financial needs to a lender. Remember, lenders want to make loans, but they must make loans they know will be repaid. A well-written business plan is a good way to give the lender an overall picture of your business. Accompanying that should be a loan proposal containing:
1. Credit history
Obtain a credit report on yourself and your business before you apply so you know what the lender will see. Then if there are any inaccuracies or problems, you can address them before you submit your loan application. If you can, find out which credit reporting company the lender uses and request a report from that company. Most credit reporting agencies have methods for the consumer to obtain a copy of their credit history. Some of the most common credit reporting agencies are:
If there are problems with your credit, a good source for help is the National Center for Financial Education. They provide worksheets and advice on debt management.
2. Cash flow history and projections for the business
Cash flow history is used to project your business's cash inflows and outflows over a period of time. Lenders use it to predict the ability of your business to create the cash necessary to pay back the loan. It can also be useful to you to project your business's cash inflows and outflows and predict your business's cash flow gaps - periods when cash outflows exceed cash inflows. A sample Cash Flow Budget Worksheet template is available online from the Business Owner's Toolkit. Be certain to include in your cash flow projections the cost of the loan. The amounts you would be paying can be calculated from the requested amount to be borrowed, the length you anticipate needing the loan and the estimated interest rate.
3. Information about any collateral that might available
In a startup business, a commonly used source of collateral is the equity value in real estate, such as your home. Other possible collateral sources are inventory, accounts receivable, equipment and securities.
4. Information about the your character
Characteristics assessed in valuing character are such intangibles prior business experience, an existing or past relationship with the lender and references from professionals (accountants, lawyers, business advisors) who have reviewed your proposals. Additionally, the care and effort you have put into the business planning process suggests your level of commitment to the business.
5. Business and personal financial statements and income tax returns
There are a wide variety of ratios a lending agency might look at in assessing your financial statements. Some of the most common are:
- The amount of cash and working capital a company has.
- The amount of debt on a company's balance sheet.
- An accurate count of your inventory to determine inventory turnover, particularly if you run a wholesale or retail operation.
- Turnover (or Activity):
- The turnover of receivables, inventory and sales.
- Receivables Turnover:
- The amount of accounts receivable in relation to sales.
- Gross Profit Margin:
- Net sales (minus returned goods, discounts, and price reductions) minus cost of goods sold.
- Return on Sales:
- The percentage of profits remaining after direct expenses, overhead, unusual items and taxes.
The most commonly reported mistake in obtaining a loan is that the person does not know how much money they need. Be prepared to provide not only an exact amount, but how you arrived at that amount, and what you plan on using it for.
All of this information is important for you to know and have available whether or not you seek a loan. Loans are indeed possible and the process of applying is in all likelihood also good for your deeper understanding of the financial outlook for your business.