Obtaining a loan can be confusing, but the process can be simplified if you have the right information and know the types of loans available.
Prior to meeting with your banker, do some research and think about your needs. Be clear about the loan’s purpose and the amount and length of time that it’s needed.
Approval of small business loans are based on several factors, including how long the company has been in existence and its profitability. During the application process, most lenders review the previous three years of corporate and personal tax returns, and income statements and balance sheets on the business.
If you have accounts receivable, prepare an aging report of those receivables. If your company is new, you’ll need a business plan and projections. It’s common for lenders to ask for a personal financial statement from each owner and obtain a credit report on each.
Be prepared to explain the collateral available to secure the loan. The most common are the business’s assets, and that includes filing a lien on the company’s inventory, equipment and accounts receivable. Most financial institutions lend against a percent of the value of the collateral. For example, for equipment valued at $50,000, the bank might lend 50 percent, or $25,000.
When a loan is used to buy specific equipment, it can usually be used as collateral, and the percent of loan to value is normally higher. If your business’s assets aren’t enough to secure the loan, you may be asked to pledge personal assets, including a mortgage on your residence, stocks, mutual funds or other investments.
There are a variety of loan options. To finance the purchase of a fixed asset like equipment or vehicles, your banker might suggest a term loan. Term loans are for a specific dollar amount, have a regular monthly payment and are in effect for a certain time period. When the balance reaches zero at the end of the term, the loan is paid in full and any collateral held is released.
The draw note is a tool to use when expanding your business or making several purchases over a longer time period. It’s written for the total amount you need to complete the project, and draws are made as you need the money to pay invoices. In most cases, you’ll be billed only for the interest accrued on the amount drawn. When the project is complete, the total amount is converted to a term loan.
A line of credit is established for a specific amount and you can withdraw funds at any time. As principal payments are made, the line of credit becomes available again. In most cases, the monthly payment is interest only, giving you flexibility in the payment amount and providing additional funds to cover expenses.
The line can be paid down to zero at any time without being closed. It’s often recommended that businesses obtain a line of credit before funds are needed so they’re available when that time comes.
Ask your lender to consider government programs to assist in financing, especially when purchasing fixed assets. Some programs offer lower rates if you add employees during the loan’s term. Others allow smaller down payments and longer terms. Lenders may be more flexible on collateral requirements if a government guarantee is involved.
Your banker should provide you with options and be your partner in tailoring the right lending product to fit your specific needs, helping your business achieve long-term success. Jane Bittcher is vice president, business development group at Fifth Third Bank. Reach her at (614) 233-4562 or [email protected].
