How to Get a Small Business Loan

How to Get a Small Business Loan

Before you go to the bank…

Ask yourself these questions:

* What must I finance to support my needs?

* What amount of financing will meet my needs?

* When and for how long will I need these funds?

* How will I generate sufficient cash flow to repay the loan?

If you’ve already started your business:

* Prepare a financial statement (balance sheet) listing all assets and all liabilities of the business and an earnings statement for the current period.

* Put together a financial statement of each owner, partner, or stockholder owning 20 percent or more of corporate stock.

* List collateral to be offered as security for the loan, with an estimate of the present market value of each item.

* State the amount of the loan requested and the exact purposes for which it will be used.

* Take the above material to your banker. Ask for a direct loan and if you are declined, ask the bank to make the loan under the Small Business Administration’s (SBA) Loan Guarantee Plan. If the bank is interested in an SBA guaranteed loan, ask the banker to contact the SBA for discussion of your application. In cases of guaranteed loans, the SBA will deal directly with the bank.

* If a guaranteed loan is not available, write or visit the nearest SBA office. To speed matters, make your financial information available when you first write or visit the SBA.

If you’re starting a new business:

* Describe the type of business you plan to establish.

* Describe your experience and management capabilities.

* Prepare an estimate of how much you or others have to invest in the business and how much you will need to borrow.

* Prepare a current financial statement (balance sheet) listing all personal assets and all liabilities.

* Prepare a detailed projection of earnings for the first year the business will operate.

* List collateral to be offered as security for the loan, indicating your estimate of the present market value of each item.

* Take the above material to your banker. Ask for a direct loan and if you are declined, ask the bank to make the loan under the Small Business Administration’s (SBA) Loan Guarantee Plan. If the bank is interested in an SBA guaranteed loan, ask the banker to contact the SBA for discussion of your application. In cases of guaranteed loans, the SBA will deal directly with the bank.

* If a guaranteed loan is not available, write or visit the nearest SBA office. To speed matters, make your financial information available when you first write or visit the SBA.

The answers to these questions are central to the lending decision. And the information you provide will help the banker make the decision as quickly as possible.

The Review Process

Every lender tries to understand the condition of the borrower’s business as well as its prospects. That’s why you’re asked to submit several types of financial statements. This information provides the banker a chance to see how critical aspects of your business relate to each other.

The following are some of the measurements of interest to bankers in gauging your company and its strengths:

Liquidity – The amount of cash and working capital a company has is very important to bankers as an indication of how efficiently a company generates internal cash flow, which can be used to repay the loan.

Leverage – The amount of debt on a company’s balance sheet, when compared to the amount of equity in the business, will give the banker an idea of how leveraged (in debt) the business is.

Inventory – Your banker will want an accurate count of your inventory, particularly if you run a wholesale or retail operation. An accurate inventory count will also help determine inventory turnover. Occasionally a physical count of your inventory will be necessary.

Turnover (or Activity) – Activity refers to the turnover of receivables, inventory, and sales. By measuring these variables in relation to one another and to fixed assets, the banker gets an idea of how much activity results form the company’s day-to-day operations.

Inventory Turnover – Inventory ratios may have the most value in monitoring internal operations, although they provide useful background for a financing plan, as well. Your nventory turnover ratio is delicate. It helps you achieve the right balance between overstocking and under-stocking, a fine line to be sure. If you’re overstocked, you pay interest on working capital as well as paying for inventory. You don’t want to pay double duty. If you’re under-stocked, you could have stock-outs, which could give your business a bad image and cause a loss of sales.

Receivables Turnover and Average Collection Period - Your own credit policy is one of your most important marketing decisions. If your credit is too tight, you lose sales. If it’s liberal, your carrying costs are higher than necessary. You must collect receivables within a reasonable time for them to remain a liquid asset. The receivable turnover ratio measures the amount of accounts receivable in relation to sales.

Gross Profit Margin – This ratio provides a clear indication of the basic ability of your business to meet direct costs and operate profitably. Gross profits are net sales (minus returned good, discounts, price reductions, etc.) minus cost of goods sold.

Return on Sales – This ratio is an overall measure of the profitability of the business. It illustrates the percentage of projects remaining after direct expenses, overhead, unusual items and taxes.

Your banker can help you calculate these ratios and others they will require. Ask your banker or accountant to provide you with industry averages for your particular industry.This can help you determine how your company stands in relations to your peers.

Source: Iowa Bankers Association