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Many small business owners understand how to effectively manage their day-to-day operations, but are unsure of how best to prepare for loan approval. Business owners can maximize their chances of approval by learning what potential lenders expect. Banks like to see that potential borrowers have done their homework and are adequately prepared. The first step in the lending process is to meet with the lender’s business development officer (BDO). Making a good impression on the BDO won’t secure funding, but it is an important step toward securing the next meeting. The BDO decides whether to give prospective borrowers access to the key audience, the credit officer and loan committee. To ensure the highest possibility of getting loan approval, business owners should make the following preparations: Create a short description of the business The first questions a lender will ask a business owner are basic details about the company, such as what purpose it serves and how it works to achieve this purpose. Many owners forget to draft a clear and concise overview of their company. Be sure to prepare one that includes short sections reviewing products, services, customers, competition, history, management and ownership. To test whether or not the business description is effective, find a fifth grade student to read it over and then ask them to describe the business to his or her friends. If an11-year-old cannot understand or communicate the company's purpose, then the description is not going to work well for a lender. Gather financial statements Banks require three years of historical, year-to-date and actual-to-prior-year financial statements. If the business does not possess these necessary records, the business owner can try to get a loan from asset-based lenders instead. Asset-based lenders require much less historical information since their credit decisions are based on future prospects. Regardless, the financial statements should include a clear overview so the credit staff can quickly calculate Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA); tangible equity; debt-to-equity; fixed charge coverage; quick ratios; and liquidation values from the sale or collection of assets. Potential borrowers can impress a lender by calculating these figures ahead of time and including the findings in their statements. Estimate projections While financial history is significant, future objectives are paramount. Lenders want to be sure they are lending to a business that has growth potential and will use the money in productive ways. Carefully explain the steps the business is currently implementing to ensure business growth, and clearly communicate how the business will use the proceeds of the loan. Banks regularly turn away businesses that are suffering or failing, so business owners must demonstrate signs of growth. Provide the lender with specific projections using the same line items as the historical financial statements. Make sure that the forecast sales and/or margin improvements are attainable, as lenders can quickly identify if the figures are realistic or not. If they seem farfetched, the business will lose credibility and will likely be turned down. Submit accounts receivable, accounts payable and inventory aging reports The lender may want either summary or detailed aging reports, so ask which they prefer. Do not expect every lender to be the same; each will likely have different preferences. Also, focus on quality over quantity when supplying reports. The lender will appreciate it and is more likely to respond positively. Provide tax returns Lenders expect business owners to provide tax returns; these documents help validate the rationale of business financial statements and projections. Present personal financial statements Banks and some asset-based lenders will also require personal financial statements. Proactively providing personal financial statements without being asked will create a better first impression. If managers can show they can manage their personal finances well, lenders will be more apt to assume they can manage their business finances also. Disclose negative information promptly. Business owners should be forthcoming and not try to hide any dirty little secrets. Failing to disclose information about the business, the owner or the company’s shareholders can damage a company’s chance for securing a loan. Remember, lenders have access to databases that provide “instant background checks” and they will do their own research. It’s better to reveal any negative information on your own terms. A business owner can make a good first impression on lenders by thoroughly preparing for a loan, thus significantly improving the company’s chances of achieving approval. Although it doesn’t guarantee success, proper forethought and careful planning go a long way toward winning over a lender.
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