Many organizations need external funding to either launch or expand. Often, they can obtain the needed capital through commercial loans or other lenders.
If you and your organization’s leaders believe a loan will soon be necessary, it’s important to be confident about obtaining the necessary funds. Start by having valid reasons for borrowing money and a well thought out financial plan. From there, you need to talk to your bank or potential lenders with confidence and professionalism.
Essential Questions About Commercial Loans
First, familiarize yourself with how the process works. It’s essentially built on four basic questions:
- How much money do you want?
- How do you plan to use the loan proceeds?
- When do you need the funds?
- How soon can you repay the loan?
Your loan officer will also likely ask about your organization’s previous sources of financing. So, be ready to explain how you’ve financed your organization to date. Methods may include personal cash infusions, forgone salaries and sweat equity, as well as any equity contributions from friends, family members, and outside investors.
Loan Products. As you’re probably aware, banks and lenders offer a variety of commercial loan products. Another way of expressing confidence is to know what you want. Common options include:
Lines Of Credit. One of these gives you access to an agreed-upon amount of funds that you can draw on as needed. As is the case with a credit card, you pay interest only on the outstanding balance.
Traditional Term Loans. These are what most people likely envision when they see the term “commercial loan.” You receive a lump sum with repayment terms, which include a payment schedule and interest rate.
Asset-Based Loans. True to the name, asset-based loans typically fund equipment purchases or plant expansions. The length of the loan is usually tied to the life of the asset being financed, and that asset is usually pledged as collateral.
Supporting Documents
No matter the product, banks and lenders want to work with serious borrowers who are deeply knowledgeable about the financial condition and projected performance of their businesses. To this end, don’t go into the initial meeting empty-handed. Prepare a comprehensive loan application package that includes:
- A “statement of purpose” explaining your strategic plans for the funds,
- Your business plan,
- Three years of financial statements, if available,
- Three years of business tax returns, if available,
- Personal financial statements and tax returns for all owners,
- Appraisals of any assets pledged as collateral, and
- Carefully prepared, reasonable financial projections.
Remember that most loan officers have been around the block. They know how to critically evaluate financial documents and prospective borrowers’ underlying assumptions. As much as possible, support your case with market research and data. Be confident — but realistic — about your strengths and market opportunities, as well as forthcoming about the challenges you’ll likely face in accomplishing your strategic objectives.
If your bank or lender finds your business a viable borrower, your application will be given to an underwriting committee or department. Underwriters will have greater confidence in your financial statements if they’re prepared by a CPA and conform to U.S. Generally Accepted Accounting Principles. Professionally prepared financial projections are also recommended.
Shop Around
Underwriters don’t approve every loan application, so don’t give up if a bank or lender turns you down. In fact, it’s a good idea to shop around. For help preparing to apply for a commercial loan and managing the approval process, contact us.