Business Owner's Manual

Getting Ready for the Lender

 

You have been researching your business venture and you're ready get things off the ground. Or, you have already started your small business and need funds to grow. What can you expect when you approach a lender? What are lenders looking for?

 

The Five C's Of Credit

  A trite, but true, summary of what lenders consider:

• Capacity to repay is the most critical factor, and the lender wants to know the details of your repayment plan. Critical issues include the cash flow from the business, the timing of the repayment, and the probability of successful repayment. Your financial statements and business plan (see below) will be particularly important, and payment history on existing credit relationships — personal or commercial — is considered as an indicator of future performance. If you have serious credit problems, e.g. numerous delinquencies, tax liens, or a bankruptcy, fix the problem first before requesting a loan. On the other hand, if you have excellent credit, it could tip the decision in your favor. Individuals who handle their personal credit well tend to handle their business credit in the same fashion.
  
  
• Capital is the money you have personally invested in the business. Lenders want to know that you've made a significant financial contribution to the venture — from 30 to 50 percent of the funds required — and that you have undertaken a personal risk. (If you haven't, why should they?)
  
  
• Collateral (or guarantees) are additional forms of security you can provide. Giving a lender collateral means that you pledge an asset, such as your home, to the lender with the agreement that it will be a source of repayment in case the business cannot generate the necessary funds. A guarantee is a written promise by a third party to repay the debt if you can't.
  
  
• Character is the impression you make on lenders. A lender must believe you are reliable and will consider your background, experience, and the quality of your references as well as the background and experience of your partners and employees.
  
  
• Conditions focus on the intended purpose of the loan. How will the money be used? The lender will also consider the local economic climate and conditions within your industries and other related industries.

 

Necessary Documents

You should call ahead to confirm exactly what documents the lender requires. The answer is likely to be different depending on the maturity of your business and other factors, but most lenders are looking for the items discussed below.

• Personal tax returns for each owner.
  
  
• A Personal Financial Statement for each owner. This document indicates net worth — assets (cash, real property, cars, etc.) minus your liabilities (unpaid bills and loans). It will give a lender evidence of personal assets that could be pledged to secure a loan.
  
  

• Financial documents for the business, described below. Existing businesses should submit historical information — either records prepared by an accountant or business tax returns — from at least two consecutive years. Start-ups should prepare projections for the first two or three years of operation. Online self-calculating worksheets and interactive instructions for start-ups are available at the Edward Lowe Foundation Web site by choosing "Thinking About Starting a Business" or "Just Starting Out" under the "For Business Owners" category.
  
  

• A Balance Sheet provides a snapshot of the company at a specific time. It shows what the company owns, including its cash on hand and its debts or liabilities (generally, loans from others). It also shows the capital ("equity") put into the business.
  
  Note: The projection or "pro-forma" balance submitted by a start-up should show the business' projected opening equity (the money you expect to put in) and liabilities. Projections for additional years may not be necessary.
  
  

• A Profit and Loss Statement (a "P & L") shows the profit or loss of the business for a specific period, usually a year. It shows the sales, less the cost of goods or services sold, less other expenses. A Profit and Loss Statement should reflect all expenses, even if you haven't paid them out, and all income, even if you haven't collected it.
  
  

• A Cash Flow Statement represents a reconciliation of the income and expenses of your company to the actual cash inflow and outflow. Certain transactions such as borrowing money, receiving capital, or purchasing equipment are not income and expenses, but they do have an obvious effect on your cash flow. These items are reflected in a Cash Flow Statement. This is a complicated document and difficult to prepare. For help, contact an accountant or use the Services Directory and look under "Business Advice and Networking."