Articles
- Key Points to Consider: Lets begin by exploring some of the key points your banker will review
- Borrowing Money - Have answers to the following 14 questions
- Should You Apply Yourself or Higher Someone? Pros and Cons
Key Points to Consider: Lets begin by exploring some of the key points your banker will review.
1. Will the business have the ability to repay the loan:
The ability to repay the loan must be justified in your loan package. Banks want to see two sources of repayment --- cash flow from the business, plus a secondary source such as collateral. In order to analyze the cash flow of the business, the lender will review the business's past financial statements or projections of a new business.
2. Credit History of the business and/or the Principals
One of the first thing a bank will determine when a person/business requests a loan is whether their personal and business credit is good. Therefore before you go to the bank, or even start the process of preparing a loan request, you want to make sure your credit is good.
3. Equity
Financial institutions want to see a certain amount of equity in a new business or expansion of an existing business. Equity can be built up in a business through retained earnings or injection of cash from either the owner or investors. Most lenders want to see that the liabilities or debt of a business is not more than 4 times the amount of equity. Therefore if you want a loan you must ensure that there is enough equity in the company to leverage that loan. It must be understood that a start-up business can not obtain 100% financing through conventional or special loan programs. A business owner usually must put some of his/her own money into the business. Most lenders want the owner to put at least 20% to 33 1/3 of the total request.
4. Collateral
Financial institutions are looking for a second source of repayment, which often is collateral. Collateral are those personal and business assets that can be sold to pay back the loan. The value of collateral is not based on the market value. It is discounted to take into account the value that would be lost if the assets had to be liquidated.
5. Experience
A client that wants to open a business and has no experience in that business should not seek financing let alone start the business unless they intend to hire people who know the business or take on a partner that has the appropriate experience.
Borrowing Money
Have answers to the following 14 questions.
- Can the business repay the loan? Is the cash flow greater than debt service? At least 1.5 times
- Can you repay the loan if the business fails?
- Does the business collect its bills?
- Does the business control its inventory?
- Does the business pay its bills?
- Are the officers committed to the business?
- Does the business have a profitable operating history?
- Does the business match its sources and uses of funds.?
- Are the sales growing?
- Does the business control expenses?
- Are profits increasing as a percentage of sales.
- Is there any discretionary cash flow?
- What is the future of the industry?
- Who is your competition and what are their strengths and weakness?
Should You Apply Yourself or Higher Someone? Pros and Cons
Discuss this with the lender as the lender may want you to hire someone from the bank to prepare the application or hire your accountant to prepare the application. The accountant or bank will charge $850.00 to $1250.00 to prepare the application. If you will prepare the application yourself, you must know what the parts of the application must be prepared. You must have a business plan prepared to assist with the application preparation. Their are professional firms which prepare the loan applications. Their fees will be from $950.00 to $1250.00 plus they want a 1% completion fee. I would suggest that you visit with the bank to see what their preference is.