One of the first things overly-optimistic entrepreneurs discover as they look for funding is that banks don’t fund business plans. In their defence, it would be against banking law if they did. Banks are dealing with depositors’ money. Would you want your bank to invest your current account balance in a start-up? I would not and neither would the banking regulator, according to articles.bplans.com.
So, here is what to expect a bank to ask for when you apply for a commercial loan for your business. There will be occasional exceptions to every rule but here are the general rules:
As explained above, banks do lend money to start-ups. One exception to the rule is that there are programmes that guarantee some portion of start-up costs for new businesses, therefore, banks can lend them money with the government, reducing the banks’ risk.
So, your business has to have hard assets it can pledge to back up a business loan. Banks look very carefully at these assets to make sure they reduce the risk. For example, when you pledge accounts receivable to support a commercial loan, the bank will check the major receivables accounts to make sure those companies are solvent; and they will accept only a portion, often 50 or sometimes 75 per cent, of receivables to back a loan.
When you get an inventory loan, the bank will accept only a percentage of the inventory and then examine your claims carefully to make sure it is not old and obsolete inventory.
The need for collateral also means that most small business owners have to pledge personal assets, usually house equity, to get a business loan.
There are exceptions, but the vast majority of commercial loan applications require a business plan document. Nowadays, it can be short—perhaps even a lean business plan—but banks still want that standard summary of company, product, market, team, and financials.
All of your business’s financial details
This includes all current and past loans and debts incurred, all bank accounts, investment accounts, credit card accounts, and of course, supporting information such as tax identity numbers, addresses, and complete contact information.
Complete details on accounts receivable
This includes aging, account-by-account information (for checking their credit), and sales and payment history.
Complete details on accounts payable
This includes most of the same information as for accounts receivable and, in addition, they will want credit references, companies that sell to your business on account that can vouch for your payment behaviou646r.
Complete financial statements, preferably audited or reviewed
The balance sheet has to list all your business assets, liabilities and capital, and the latest balance sheet is the most important. Your profit and loss statements should normally go back at least three years, but exceptions can be made, occasionally, if you don’t have enough history, but you do have good credit and assets to pledge as collateral. You will also have to supply as much profit and loss history as you have, up to three years back.
Regarding audited statements, having ‘audited’ statements means you have paid a few thousand take some formal responsibility for their accuracy. CPAs get sued over bad audits. The bigger your business, the more likely you will have audited statements ready as part of the normal course of business for reasons related to ownership and reporting responsibilities.
Having statements reviewed is a lot cheaper. Banks won’t always require audited or even reviewed statements because they always require collateral, assets at risk, so they care more about the value of the assets you pledge.
All of your personal financial details
This includes net worth, details on assets and liabilities such as your home, vehicles, investment accounts, credit card accounts, auto loans, mortgages, the whole thing.
For businesses with multiple owners, or partnerships, the bank will want financial statements from all of the owners who have significant shares.
And yes, as I implied in the introduction to this article, that’s leading to the personal guarantee. Expect to sign a personal guarantee as part of the loan process.
Since it is all about reducing the risks, banks will often ask newer businesses that depend on the key founders to take out insurance against the deaths of one or more of the founders. And the fine print can direct the payout on death to go to the bank first, to pay off the loan.
Copies of past returns
This is to prevent multiple sets of books—which I think would be fraud, by the way—but banks want to see the corporate tax returns.
Agreement on future ratios
Most commercial loans include what we call loan covenants, in which the company agrees to keep some key ratios—quick ratio, current ratio, debt to equity, for example—within certain defined limits. If your financials fall below those specific levels in the future, then you are technically in default of the loan.
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