Getting Your Business Loan Approved

Business loans: In today's capital markets, all lenders have their specific lending policies. As such, to get your loan request approved, your business has to conform to these policies. Gone are the days when a lender will modify their policies to your business.

Understanding each lenders policy and what they require from your business is the first step in landing that sought after business loan.

How Lenders Make Money:

Banks and other lenders make money from interest and fees.

They either borrower capital or acquire capital from depositors or investors and lend those funds out to borrowers (like you).

If they can lend those funds out at interest rates higher then what they pay - then they have positive revenue.

Example: A bank borrows $100,000 from the Federal Reserve at 2% then lends those funds out to your business at 10%. They can make, excluding fees, 8% per year on those funds or some $8,000 per year.

Then, they simply repeat - making money off volume lending (If repeated 1,000 times, this lender could realize over $8 million in top line revenue a year.

The same is true from depositor's and investor's money. Your bank pays you 1% or 2% (much less these days like one-half of 1%) for your deposits into checking accounts, money market accounts or CDs or promises investors a certain level of return on their capital.

If they can put those funds out at a higher interest rate then they have to pay to get those funds - they make money.

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What Lenders Want:

Lenders want to get repaid - period.

Just like you want to get paid for the products or service you provide, lenders want to get paid for making loans.

If they can't make money from making loans then they will take that capital into other industries and put it to work there.

One way to ensure that that they get repaid, lenders look for borrowers who pose the lowest level of default risk and thus design their lending policies to minimize their risks - based on standard practices, their markets and their individual experiences.

Their loan policies will cover the following (depending on loan type):

• Credit History. All lenders want to ensure that you have paid past obligations as agreed. This is shown from your credit report and credit score.

• Repayment Ability. As stated, lenders want to get repaid. Thus, the borrower must be able to demonstrate an ability to make the loan payments (service the debt).

  Most lenders will look backwards at the borrower's past cash flow. Here, they reason that if a business has made enough cash flow to cover the loan payments over the past say three years and this loan request is for three years then the business should be able to make enough cash flow over the next three years to make payments.

  While some lenders will look forward at pro formas, very seldom will they use those projections in their decision - unless the future income is guaranteed.

  If you pass these then the lender looks to collateral and guarantees for additional sources of repayment should your business default (remember, lenders want to get repaid - period).

• Collateral. Lenders evaluate collateral based on what they think that can quickly resell it for. Thus, you typically see loan-to-value ratios of 80% or less. This means that if your collateral is valued at $100,000 they will only lend 80% of that value.

  They do this for two reasons. 1) Lenders are not in the collateral business they are in the lending the business. The longer they have to hold on to collateral the longer they are not getting paid on the defaulted loan and the longer it takes them to get new money out the door. The cheaper they can sell off your collateral, the quicker they can get their money and move on. 2) If the borrower has 20% of their own capital in the game - the borrower will be less likely to just walk away when the going gets tough.

  Keep in mind that the easier the collateral is to sell (the more uses it has) the more the lender will lend against it. Lastly, should the business not have specific collateral to back the loan, many lenders will take blanket UCC-1 liens on all of the business's assets.

• Guarantees. Many things can happen to both the business and the collateral over the course of the loan's term. And, as such, lenders might not be able to cover their total costs from just reselling the collateral.

  So, they look to personal guarantees from the borrowers, business owners, investors, etc. to cover any differences.

Just know that if you want your business loan approved you have to ensure that your company can make the loan payments, can show several sources of repayment (collateral and guarantees) and that those requesting the loan are willing to put the lender at the top of the list for payments (show from credit reports).

Regardless of what "hoops" you have to jump through - once the loan is approved and funded - you can move on with your business. So, jump through the hoops and start making money!

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What You Need:

Here is a basic list of what most lenders will require with your loan package (know that your actual list of items will depend on your type of loan):

• Personal Credit Scores: Credit scores should be at least 680 FICO or higher. But, in today's market, scores really need to be over 700 FICO. Lenders will pull personal credit reports of all owners, officers, directors or partners with 20% or more ownership in the business.

  Even if you want to rely on business business credit for your loan, lenders will still want to see how you and others in your company have personally dealt with other creditors as well as to put in place personal guarantees (if needed).

  Regarding business credit. Business credit won't hurt your chances of getting a business loan unless it is bad but a good business credit score will never substitute for bad personal credit. Lenders know these tricks as well.

• Financial Statements: Audited preferred. Used to determine cash flow to ensure the business can meet payment requirements. While proforma statements are OK - lenders look backwards first.

• Business Tax Returns: To complement the financial statements. Many lenders will also ask for personal tax returns if personal guarantees ar required.

• Collateral Description: Should you use collateral to back your loan, then have a proper legal description of your collateral and its potential value from an outside, third-party source.

• Business Plan: Usually required for start-up business and business in operations under three years. This allows the lender to better understand the business's potential, management and if the business has a solid revenue model.

If you understand what lenders look for and what they use to make their decisions, you can easily look at and prepare those items before hand. If you see weaknesses, then you have time to fix them before applying for your business loan. Know that in business marketing and development, first impressions are the most important. The same is true when applying for a business loan.

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How To Prepare:

Preparing for your business loan request is really quite simple in concept - merely understand what lenders and looking for and provide those items - demonstrating that your business can and will repay the loan. But, in practice, this can get a bit more complicated.

First - you have to make sure that your credit and the credit of all the owners, partners, investors are in tip-top shape. Lenders don't want to waste their time with loans they can't get approved (based on their loan policies). Thus, they pull credit first and if you don't pass here, your potential lender will quickly move on - regardless of your excesses.

Thus, take the time now to improve your credit score - ensuring that it is above 700 FICO.

Second - Cash flow. It is from cash flow that your business will make the loan payments. Ensure your cash flow not only covers the minimum payment but covers 25% or more should your business face a slow period. Remember, you have to clearly demonstrate that your business can make payments - usually from past results.

Example of adequate cash flow. Your business wants a $100,000 business loan at 10% for 60 months. This would mean a monthly payment of $2,125 pr month.

Your lender has a payment ratio 1.25 times. This is to ensure that your business could still make the payment even if your cash flow slips by up to 25% in any payment period.

Thus, your cash flow to service debt payments (cash flow after operating expenses and taxes) should be 1.25 times your payment or $2,656 per month - at a minimum.

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