Before you see your financial institution to discuss a possible business loan, you should look to improve a number of aspects to help set up the best conditions to borrow.
Prepare Your Business in Advance
Have a Set Date Planned
The earlier you can notify your financial institution of needing to finance a loan, the better off you will be. Longer lead times give you time to get your business documentation in place, while identifying contingencies in case the exact financing you sought doesn’t pan out. You should aim to provide two to three weeks notice if possible.
Reduce Existing Debt
Being able to remove other financial commitments will reduce the drain on your cash flow and help with any new repayments that new finance will require. Consider re-financing any short-term debt that’s easier to manage or budget for.
Improve Business Efficiency
If your business is running like a well-oiled machine, you’re demonstrating a business that’s efficient, which gives lenders confidence that the funding you’re asking for will be well used. Review any parts of your business that could be cleaned up, including how you process orders, the software you use, supply chain management logistics and staffing levels.
Forward Contracts or Proof of Future Sales History
Proof of repayment isn’t just because you financial institution wants to know the loan will be repaid. They want the business to be successful and not at risk of default. Proof that you can repay the loan is also for your comfort. Prepare evidence of on-going revenue.
Describe Steps Taken to Avoid the Need to Borrow
In a perfect world, your business would generate the excess cash flow you need to reinvest in the business. But it’s not always possible or practical. Large purchases such as land, buildings or expensive equipment are often funded from lending, as well as research and development and long-term projects that require long-term funding. However, it’s useful to be able to explain the actions you’ve taken to avoid the need to borrow, or what you’ve contributed to the need.
Proof of Financial Stability
Create a Cash Flow Forecast With a Repayment Schedule
Cash flow forecasts help predict the impact of a loan on your business. Add the loan amount to cashflow in, then add in the loan repayments. The new figures in your cash flow forecast will tell you whether the loan is likely to place your business in a stronger position. Include best, worst and most-likely-case sales scenarios to see how your business will perform if you suddenly hit tough times or better than expected trading conditions.
Clean Up Your Balance Sheet
Ensure your accounts are up to date and accurate and take time to identify if you need to take any action over your balance sheet, which documents assets, liabilities and owner’s equity. If the balance sheet shows negative assets, or the assets are hard to convert into cash, then you’re in a weaker position to borrow. One way to do this is revalue any assets that have a low book value, but you know they are worth much more.
List What You’ve Contributed to the Business
Document the capital you’ve contributed to the business and any other financial aspects. A history of all your achievements adds to the story of your business.
Outline How You’ll Secure the Loan
At some stage some form of collateral is probably needed for most loans. Be prepared to answer what you have to back up the loan if everything turns south against anyone’s control.
Describe Your Business and Industry Experience
List the non-financial benefits of your involvement, such as industry knowledge, experience, networks, process and know how. Your ability to run the business, use the funds wisely and for what you said, is very important.
Clear Any Legal or Tax Issues
You’ll want a problem-free business to present to any lender. Having taxes all up to date will help reassure the bank that the business is well run and aware of their legal responsibilities. Similarly, clear any other issues such as disputed employment agreements, contracts or delivery issues.
Financial History
A Personal Statement of Financial Position
A personal statement of financial position is a snapshot your financial situation at the particular point you apply for funds. List all your personal assets such as cash, savings, investments, property, and vehicles, as well as any liabilities like mortgages, loans, and credit card balances. The difference between the total assets and the total liabilities is the net worth.
Justify How Much You Need to Borrow
It’s important to give a clear reason why you’ve decided on the amount you want to borrow. Too much and the bank may question why you need such a large sum, too little and there could be a problem of needing more funding later. Each indicate poor planning.
Explain What You’ll Use the Loan Funds For
Be crystal clear what the loan will be used for. Common uses include:
- Money to cover initial expenses such as equipment, inventory, and office space.
- To expand operations, such as opening new locations, hiring additional staff, or purchasing new equipment.
- To cover day-to-day expenses such as salaries, rent, and utilities when cash flow is temporarily limited.
- To purchase inventory to meet demand or take advantage of bulk purchasing discounts.
- To consolidate its debt by taking out a loan with a lower interest rate to pay off higher-interest loans or credit cards, which can save money on interest payments in the long run.
- To cover unexpected expenses or to take advantage of a sudden business opportunity.
- To invest in new projects or initiatives that have the potential to generate additional revenue or improve the company’s long-term growth prospects.
Check Your Credit Score
You want to be confident your credit score is sound so it’s important you’re aware what it is. Identify any blemishes on your personal and business credit report and fix or clear up any inaccuracies. Diamond Credit Union offers free credit reviews. Schedule an appointment for your review here.
Your credit score is a numerical representation of your creditworthiness based on the information in your credit report.
Include a Business Plan
Write a business plan to describe your financial needs and outline a roadmap for how the loan will grow your business. Describe how your business will change in the next few years because of the loan. Try not to brush off an old plan. Create a new one, even if it’s reduced in length or a lean plan.
Include an Up-to-Date Profit and Loss Account
A profit and loss account, also known as an income statement, is a financial statement that summarizes your revenue and expenses over a specific period of time, typically a month, quarter, or year. The purpose of a profit and loss account is to show whether the company has made a profit or a loss. Most likely you’ll be able to download a Profit and Loss Statement from your accounting software for the last 12 months.
Include an Up-to-Date Balance Sheet
A balance sheet provides a snapshot of your financial position at a specific point in time, usually the end of your financial year. It shows assets, liabilities, and equity, providing a clear picture of the financial strength of the business. Too high a debt load, too few assets or excessive director current accounts can signal a wobbly structure which more debt could unbalance. Most likely you’ll be able to download a Balance Sheet from your accounting software for the last 12 months.
Outline the Legal Structure
The three main legal structures are:
- A sole proprietor, where the business is owned and operated by a single individual.
- A partnership is owned and operated by two or more people.
- A corporation is a separate legal entity from its owners, known as shareholders.
Any Legal Documents
Details of Any Lease Terms or Other Contractual Agreements
If you lease premises, vehicles, or equipment, bring a copy of the agreement. It proves the extent of other obligations you need to cover. Similarly, also bring any contracts of supplier agreements, sales revenue or partnerships that proves your on-going prospects.
Valuation of Large Assets
Some assets such as land, buildings or expensive equipment may be worth more than the balance sheet figure. Chances are any large assets may be used as security, so current valuations will be crucial.
Import or Export Documents
If you import or export, bring any evidence such as any commercial invoices, bill of lading document as a receipt for goods being shipped, any import/export licenses to allow for the shipment of certain goods or to trade with certain countries, and insurance certificates.
License or Franchise Arrangements
Include any license agreements that give you exclusive rights to certain products or services, or licenses you may have awarded customers. Similarly with franchise agreements, especially if you are the franchisor.
Consents, Compliance or Approvals
To operate your business, include the main compliance rules and regulations you need to comply with.
Insurance Required
Circumstances outside your control could severely impact your business, so identify the insurance types relevant to your business and outline how you’ve covered any risk. Common examples: asset protection ; public liability insurance protection against financial claims from any legal action arising from death, injury or damage; business disruption insurance protects you against loss of revenue from external events such as a fire, flood, or earthquake; professional indemnity insurance provides personal protection against claims arising from professional advice you’ve provided; and key person insurance covers the business and its shareholders or partners against losing a key employee.
Security for the Loan
Depending on the loan amount, the use of the funds and your individual business circumstances, security will vary. Common security includes:
- Real estate, usually your personal home, or business premises.
- Business equipment, vehicles or other assets easily converted into cash.
- Accounts receivable, or money owed to a business by customers.
- Inventory can also be used as collateral for a business loan.
- In some cases, a borrower may pledge their personal assets such as a car or other valuable possessions.
In most cases, the bank takes ownership of the security and sells the asset to recover what is owed.
If you want more information on business loans, contact Diamond’s Business Services Team.
