Most businesses at some point need to apply for a business loan for a variety of reasons, so it is always a good idea to understand the process before you necessarily need it. What are the steps in obtaining a business loan? Each loan and loan processor is slightly different but there are a few steps that are considered to be standard for the loan process.
To begin the process, you have to be able to give a brief overview of what your business is and what it does. And you will also need to explain what the loan will be used for and why you want the financing.
Standard questions at the beginning of the loan application process include:
- What type of business do you have and how long have you been in business?
- What is the purpose of wanting a business loan? Is it for growth or additional construction? Do you need to hire more employees? Do you want to buy more equipment or inventory? The reasons are different for each business, and can vary greatly.
- How much money would you like to secure?
- What exactly will be loan be used for?
For a loan office to approve a business loan, they need to feel comfortable with the company they are doing business with. Loans need to be paid back and, in order to be paid back, the company has to have a good plan to remain in business and be profitable.
Describing your business and its history is an important part of its track record. You’ll need to give a brief summary into how your company has been run and what it’s done to succeed. Has the business shown a healthy past credit history? What is its history of debt to income ratio?
Knowing how the business is run is important as well. The products and services offered to your customers gives the loan office a more rounded picture of the dynamics of your business.
Last but not least, part of the business overview includes a look into the industry itself, as well as the market. Markets and industries change over time. Once upon a time, a home telephone was an absolute necessity to own, but times have changed dramatically. With the introduction of cell phones, less and less homes have a land-line phone. If your business sold only land-line phones, it will be less likely to succeed in the long run.
The specific financial information of a business is necessary piece of information to provide your bank, lender, or whomever you are requesting a loan from. How much revenue has the business made and what type of sales history does it show?
Specific documents will help paint a picture to the creditor, and give them the details they need to approve your loan application. You’ll need at least three years of documentation to give a well-rounded picture. Documents like Profit and Loss Statements (P&L Statements), business balance sheets, tax returns, and other relevant financial documentation will help show the business’s past financial history.
Showing your plan for cash flow projections and the future plans for your accounts payable and receivable departments will give the creditor a look into your future when it comes to profit and debt possibilities. Not only do you need to show that you have been able to remain in business and have been profitable, you also need to show how you intend to continue on the same or better path.
Part of the process of approving or denying a business loan application may include some sort of collateral to secure the loan. The value of the collateral will be appraised, and either accepted or denied.
Collateral is an asset or something of value that the lender accepts as security if the loan cannot be paid back. The lender has the right to seize that asset to cover the lack of loan repayment, which minimizes the risk for the lender.
Collateral comes in many different forms and can include assets such as:
- A specific piece of property or real estate.
- Business property, such as equipment, vehicles, or inventory.
- Investments, such as stocks or bonds.
- Outstanding invoices, or the payments that customers be making to the business.
- UCC liens or blanket liens – These liens give the creditor the legal right to any and all of the applicant’s assets or property if the loan is not repaid.
Management and Personnel
Every well-run business is backed by a solid management team and key personnel. Showing the creditor the resumes or backgrounds of the people involved in the success of the business goes a long way in proving the level of success the business has had, and will have, in the future.
Sharing an organizational chart with the lender can help as well, because it shows the lender how the business is run from the top down, and how each employee plays a part in its success.
A thorough market analysis is key to rounding out all of the pieces in a business plan. You already know what your business industry and market is, and the loan office needs to know that as well. How do you compare to other similar companies in terms of all-around success? Does the business have a solid understanding of the market trends and projections and how they may affect the success of the future?
A market analysis is an imperative part of your business plan, and it needs to be well-described to the lender.
Marketing and Sales
Knowing your market and having a strong sales plan of action adds a lot of credibility to the future success of your business, and is part of any standard business plan. How can the business loan help achieve the marketing and sales strategies? Sharing information with the loan office on exactly how the loan will be used to enhance the sales and marketing strategies will give them a better view of the business in general.
Most importantly, both the loan recipient and lender will need to know what the future plans are for the business to remain successful. They will need to both know and understand a solid plan that shows how the loan will help the business achieve its goals. Having this future plan will strongly help the possibility of getting an “Approved” stamp on the loan application.
Using each of the pieces outlined in the business plan and this business loan application process will give you the best likelihood of obtaining a loan with an excellent interest rate. Business loans vary greatly depending upon the type of loan, the lender, and the business itself. Planning well and coming prepared with all your plans can mean a difference of thousands of dollars in interest alone.