Lending institutions will vary slightly in their approach when determining your viability as a loan candidate, but the key is preparation. With a little research into the type of documentation needed for you particular venture, you can increase your chances of gaining the funds you are seeking. The 6 key categories to create a strategy for presentation to the lender are the following:
Business Plan: A business plan is particularly important for new businesses, as they lack a track record for lenders to go by. Your plan should convey all important facts about your business in a concise manner. Your business plan may range anywhere from 5 to 20 pages, plus financial projections.
In the case of small business owners, it is necessary that you are well versed in the details of your business. The ability to field questions on the spot and hold an intelligent conversation on your venture will demonstrate a commitment to your business, and project a positive image to the lender. Being informed on the minutiae also shows less likelihood of missing details in business that could later prove harmful to profits, and ultimately your lender.
Loan request: Define the type of loan you require and the amount, a great deal of thought should go into clearly deciding what type and amount would best serve your business. In addition, create a clear outline that details how the loan funds will be utilized to stimulate your venture.
Collateral: What kind of collateral can you offer to secure the loan? This includes real estate, inventory, accounts receivable, equipment and equities. Having a solid base of collateral provides a greater sense of confidence to the lender, and gives you a parachute to use in case of unforeseen circumstances.
Financial Statements: Prepare your business statements for the past three years and include current interim financial statements. Lenders will look for patterns in these statements to further assess the risk associated with lending money to your business. Be prepared to provide balance sheets and operating statements (also known as income statements or profit and loss statements) to give a more developed picture of your company to the lender. If you are just embarking on your venture, include a projected cash flow statement that shows the inbound and outbound funds. This is an opportunity for you to interject and highlight positive gains and goals your company may have met. Remember, your business and you are being analyzed in this loan equation which means selling yourself and selling your business to the lender.
Personal Financial Statements: Your personal financial statements, as well of statements of other partners, owners, and stockholders with a 25% or greater share will be assessed as well. Your personal statements will include documentation on assets, liabilities, payment habits, and tax returns for the previous three years. Your past personal financial history can positively or negatively impact whether or not you receive the loan. A great resource to utilize can be found at http://annualcreditreport.com/ . At this site, you can view your credit history free of charge, or for a small fee, obtain your credit score. The law mandates that an individual be able to receive their credit history from each of the 3 major reporting agencies each year and it can be immensely helpful in tidying up any past blips on your report.
Many people might think their credit report is clean if they pay bills on time and are relatively aware of their finances, but too often something can slip through the cracks and damage your credibility. A simple relocation might lead to a misdirected bill that then remains unpaid unbeknownst to you. Identity theft is another serious liability that can mar your credit report and don’t fall into the trap of thinking it couldn’t happen to you. In 2005, the FTC filed a report citing that 8.3 million adults in the U.S. found themselves the victim of some form of identity theft. The odds are that the majority incorrectly believed that it wouldn’t happen to them, but taking as simple a step as checking your credit report can be invaluable to you and your future goals.
Projections: Providing your lender with different sets of projections that covers both ends of the spectrum, otherwise termed “best case/worst case” scenarios, will be necessary and beneficial to you. It forces the entrepreneur to closely inspect their projections and answer the difficult questions involved if things go awry in the business. Some important factors in these hypothetical cases include cost of goods, employee salaries and bonuses, and a breakdown of sales. In certain cases, a breakeven analysis will be necessary. This is used when a company has neither a profit nor a loss. In each of these cases, factor in your own assumptions and projections based on your plans for the business. At this juncture, your entrepreneurial vision can be seen by others and start to take shape, so be confident, be organized, and always be prepared.
This list gives you a good start to develop a winning loan package. Doing your homework on document preparation may be tedious and time consuming, but ultimately protects all parties involved. The lender will be able to more aptly assess from these documents if your goal is realistic and can make alternative suggestions for business growth. You will look organized and prepared, giving the lender confidence to make the loan to you, which is why you are there in the first place.
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