Growing Your Business? Prepare for a Loan Request

Evidence is mounting that small businesses are feeling more hopeful about their prospects. Optimism among small U.S. businesses rose to its highest level in more than four years in February, according to the National Federation of Independent Business. Its small-business optimism index rose to 94.3 in February, which was the sixth consecutive monthly increase and its strongest level since December 2007.

The report also noted easier access to credit and growth in capital spending. That’s similar to what we’re seeing locally. While we’re not out of the woods yet, loan demand has increased lately, particularly for equipment purchases. And contrary to popular belief, banks are eager to lend to qualified applicants.

If you are considering making improvements to or growing your business, here are some steps you can take to increase your chances of being approved for a loan.

• Be prepared to provide three years of business and personal tax returns, three years of business financial statements, a personal financial statement, and your business plan. 
• Prepare for questions. You need to know the answers to the following:
  
  • What is the specific purpose of the loan I’m requesting? Is it for working capital, capital investments or other purposes, such as buying out a partner?
  • How much money does my business need? Not, how much can I borrow? You need enough ready money so that, with the loan, the business can operate on a sound financial footing. For new businesses, this includes sufficient resources to withstand start-up expenses and the initial operating phase during which losses are likely to occur. Generally you need to be able to provide between 10 to 25 percent of the total money required before applying for a bank loan.
  • When and for how long will I need these funds? Asset-based loans, such as loans for acquiring land, buildings or equipment, often carry terms of three to seven years, with some extending over longer periods.
  • Can I generate sufficient income, less my business expenses, to repay the loan?
  • What collateral do I have available to offer the lender?
  • Do I have or know how to prepare a business plan? A business plan describes how your business will be managed and, among many other things, documents your analysis of the business’ possible income and expenses. A proper business plan will help you make many decisions, including whether you ought to start the business or expand it in the first place. You can get assistance in preparing a business plan from various sources, including your accountant.
• Check out your credit report. Lenders use your personal credit history to help decide whether you’re a good risk for a loan, so it pays to know what they’ll find. This gives you a chance to contact the credit reporting agency and ask for a correction if you find a mistake. Always be honest about your credit history. Be ready to explain late payments or bankruptcies and how your circumstances have changed.  

Keely Ritchie can be reached at (865) 766-3029 or keely.ritchie@pnfp.com.