You have this great business idea, you have drafted a solid business plan, and now you need a loan from your bank, so you can get the ball rolling to actually start your new business and begin earning from it. Unfortunately, getting a commercial bank loan is not as easy as it seems. Banks are going to require a lot of documentation from you before they give the money.
Don’t be turned off by the whole procedure because it is the bank’s way of ensuring their client’s hard earned deposits are not invested on a new business that does not make any profit. You have to prove your worthiness to your bank and show them that you know your own inside and out business. If you are unable to show confidence in the strength of your new business idea, then they surely won’t either.
Here is what you can expect when you go to a bank and apply for your first or subsequent commercial loan for your new business venture or the expansion of an existing one. These are only general rules. Banks are free to add or take out whatever they deem necessary in the process of your commercial loan application. These general requirements for business loans are the following:
What Collateral Can You Offer
You need to possess hard assets that you can pledge to back up and secure your business loan. This is called collateral, which the bank seizes in case you default on the payments and cannot finance your loan. This collateral may come in the form of personal assets like raw land property, house equity, and expensive jewelry.
The banks examine the value of these assets to verify if they can indeed reduce the risk of lending you the money. Aside from personal assets, some established companies that need a business loan for expansion purposes can use something like their company’s future “accounts receivables” as collateral.
The companies of course will check the transaction history of those accounts to ensure that companies are solvent, and in fact, capable of paying the loan with the net revenue they receive. Typically, they only accept a portion which can range from fifty to seventy five percent of receivables value to back up the loan.
Another type is getting an inventory bank loan, which is based on your company inventory supply as collateral. Once again, the bank will only accept a small portion of the inventory, and they will really inspect your stockroom to verify that what you have is not old inventory that you will be hard pressed to sell because it is obsolete and passé.
Noteworthy: The federal SBA or Small Business Administration has set up programs to encourage small entrepreneurs to engage in business to keep a robust economy. These SBA loans don’t need collateral because the program guarantee that a certain part of the startup costs for new business ventures. Banks can lend the money without the need of collateral because the federal government has reduced the risk.
They Want to See your Business Plan
Majority of commercial loan applications would want to see a printed copy of your business plant. Consider yourself lucky if you are exempted from this! Banks need a detailed executive summary. They ask you for this business plan to see how worthy your proposition is and if you can indeed make money as based on your projection. They are interested to read about your company profile, what products you offer, who is your target market, who will be your team, how will you execute things, and what are your financial projections and anticipated operating expenses.
Submit All of your Company’s Financial Details
It may same like a wild paper chase but come prepared. On top of the list is any government ID, your tax identification number, home address, contact numbers, and company address. For new or old businesses applying for a commercial loan, they want to see all your bank accounts, current and past loans incurred, a report of your credit history, credit card accounts, and investment accounts.
Furnish Full Details on Accounts Receivable
If you are an existing business in need of a commercial loan for expansion purposes, the banks will want to see full details of your account receivable. This is the money you are due to earn from customers for the services or products you have already sold to them. Unfortunately, not all customers pay on the spot. Some wait for 30 days after they receive an invoice before they settle their bills. The banks want to get hold of all of these information, including sales and payment history.
Provide Full Information on Accounts Payable
This includes most of the information in the previous category plus additional references. This may included the companies that supply to your business. Banks will want to double check if they can confidently standby you and vouch for your payment patters. Accounts Payable refers to what you owe your suppliers. As with the former, there are some products that are delivered to your business, which you pay for after 30 days. Example is gasoline supply. Deferred payment for the gasoline stock is given by the supplier to allow you to sell a little bit, so you can easily pay for your inventory.
Complete Audited Financial Statements
The bank you are applying a loan for want to see a completely reviewed and audited financial report. This includes all your assets, liabilities, capital expenditures, and balance sheets. Your profit and loss statements should go back to at least three years. That being said, if there is not enough history, they check your list of assets and credit, instead. On top of that, if you have a pretty valuable collateral pledge, then they are not as stringent with the three year history requirement.
The term audited means your report has been drafted by a Certified Public Accountant. These professionals are well versed in balancing the numbers and dealing with the tax bureau. They have a professional standing to maintain. Their outputs are more trusted by the banks, compared to something your ordinary bookkeeper will make. A CPA’s responsibilities are huge, so they can even get sued for producing bad audits with faulty figures that do not balance. CPAs are a normal part of big businesses because they are a part of regular company operations and support/ verify details of these operations.
Reviewed statements on the other hand mean that the CPA did not make it per se, but he or she is merely reviewing a finance document that has been drafted by a not professional accountant. They have less liability because it is cheaper to get a reviewer statement than a completely audited one.
Get a reviewed or audited documents ready when applying for your commercial loan because banks will surely want to see what you have to offer before they consider your loan application. It is your responsibility to make them realize that they can take their chances on you.
A List of All Your Personal Financial Details
It may seem like an ideal situation prime for identity theft, but do not worry because banks can be trusted. They need your social security number, along with the list of all your assets and liabilities. Assets may include your house, properties, cars, bank accounts, bonds, stocks, cash deposits, and the like. Liabilities are all your loans and credit cards.
For businesses with many owners, the banks will want a financial statement from all the partners and the significant shareholder. All of you stakeholders have to sign a personal guarantee saying that you will pay for this loan and you will not default on it.
And last but not the least, since banks are always about reducing their risks, they demand that newer businesses that depend on major player to take out insurance against the death of one of these major players. The fine print will direct the beneficiary payout to go to the bank in case of his or her death. It sounds rather morbid, but it is one way for you to get that needed business loan.