By Deborah Jeanne Sergeant
If your small business needs a loan, any preparation you do can only improve your chances of approval. Area bankers weighed in on what will help you get the green light.
Tips from James “Jim” O’Connor, vice president Commercial Relationship Manager at Community Bank:
“Have three years of business tax returns available, as well as your personal 1040.
- “Talk with your accountant about what you’re looking to buy. Most CPAs have a lot of experience financing stuff.
- “Prepare a well-prepared financial statement. When you go for a loan in the name of a business, XYZ Co and you own 100% of it, the bank will ask for a ‘personal guarantee.’ When you ask for a personal, you need to have a personal financial statement—a personal balance sheet. You list your personal assets and liabilities. It’s an important factor in getting the loan. What I see often is very quickly put together statements that don’t have a lot of information. If the spouse is not an owner, we typically don’t ask for the spouse’s assets. When you do that, let’s say you own a house worth $200,000, the spouse applying should put down only $100,000. Let’s say you’re applying for a loan and your company didn’t have a great year. If you show me a personal financial statement that shows me you’re worth five times the value of the loan, that helps. If you don’t show all your assets, that makes it harder. There is a great personal financial statement form on SBA.gov.
- “If it’s a big loan request for an existing business, have one to two years’ projections as to what the new product or service will do for the business. It’s really helpful if there’s some commentary as to where those numbers come from.
- “When applying for a loan in late spring/early summer, banks like comparable interim financial statements. If it’s September 2022, we would like to see how the year is going.
- “Be prepared to discuss a down payment. Typically, banks require 10% for equipment and 20 to 30% for real estate. It’s nice when the business owner says, ‘This is where I’m coming up with the down payment.’ A lot of people are surprised by that.”
- Know your reserve capital position. That’s when an underwriter looks at the company’s short-term assets and subtracts their short-term liabilities. It’s not just cash, but receivables and inventory. We don’t want to wipe out their cash and working capital.
- “Take a look at the various SBA programs, especially business owners who are veterans. SBA programs often have longer repayment terms and reduce down payments.”
- “We look at the give C’s of credit: collateral, character, capacity to repay, capital, and conditions.”
Tips from Tim Brown, business banking sales leader for KeyBank in Central New York:
“You need a plan. Know why you’re asking. If you’re not sure where to begin, go the Small Business Development Centers, which are free. They will help individuals with a business plan, but they won’t write it.
“You will need year-to-date financial information: balance sheet and profit and loss statement and comparable information for the prior year. They can show how your growth has been.
“Be honest with your banker. We will find out the good, the bad and the ugly.
“Believe in yourself but be prepared for those tough questions. It’s better to go not just with an idea but a plan as to how you will succeed. Do the extra work. What’s the foot traffic for your restaurant? The DOT can provide average numbers of cars going by a location. Is there a need? Is it a vacated space? If you’re buying an existing business, what experience will allow you to be successful?
“Ideally, we want to see a little experience in the industry and experience in running a business.”
Tips from Sheryl Cameron, specialty finance executive director at JPMorgan Chase:
- “Establish a banking relationship. Building a rapport with your banker long before you need to borrow can put you in a stronger position to secure funding. Even if you ultimately don’t apply for financing with your bank, your banker can become a valuable business adviser. If you do apply, your banker is your representative and advocate. Bring your banker out to your business and show them what you’re doing and what your plans are. By the time that banker leaves, they will probably be your strongest advocate.”
- “Detail your plan for using funds. Be prepared to tell prospective lenders how you’ll use the financing and how it will help generate revenue. For example, if you want to buy a delivery truck, estimate how much money you expect to bring in from offering expanded delivery to your customers. Having a clear vision for the funds—both how you’ll use them and how they’ll contribute to your repayment plans—will signal to lenders that you intend to put them to good use.”
- “Improve your credit profile. Request a copy of your business and personal credit reports and scores from the major credit-reporting agencies, including Dun & Bradstreet, TransUnion, Experian and Equifax. Review the tips to improve your score and take steps to correct any inaccuracies in your payment history. If your positive payment record with a supplier is missing from your business credit report, contact that supplier to request that your payments are reported—that may boost your rating.”
- “Pay down existing debt. Reducing your current debt is often the quickest way to improve your credit. Aim to lower the balance on your business credit cards if they’re high, which immediately impacts your business credit rating. It’s best to keep your balance at 20% to 30% of your credit limit, according to Experian.”
- “Get your numbers in shape. Lenders will evaluate financial details such as your sales, sales projections, expenses and financial commitments, and cash flow to ensure you’re well-positioned to repay the financing. Go over these figures with your accountant, updating them and looking for opportunities to improve them. Be sure your business and personal finances are separate, so that you have a clear picture of your business’s performance. “Lenders will generally want to see a buffer. As an example, lenders may require that for every $1 of debt payment, there’s at least $1.15 in cash flow.”