When applying for a commercial loan for your business, it helps to know what the bank will look for. They'll give you a list of documents to provide, and they'll make some inquiries on their own, but knowing how they decide to whom and how much money to lend may help you be better prepared.
Personal and Business Credit
When you apply for a commercial loan, the lender will look at the business's credit history, and they will also look at the credit history of the owners. They want to see that you aren't overextended, meaning you have more debt than you can comfortably carry. They will look to see if you have made timely payments on previous loans, whether they are paid off or not.
A Business Plan
If you are applying for a commercial loan to start or expand a business, the lender will want to see your business plan. This should include an analysis of the competitive landscape for your product or service and realistic projections for sales and expenses for the next one, three and five years (or longer if the loan will be for more than five years). It should also include an honest discussion of the opportunity in the market and the risks you may encounter.
Cash Flow
A lender will look at the amount of money that comes in to your business compared to the amount you spend on everything from materials to salaries to paper clips and printer ink. If your business is seasonal, they will look at how that affects your cash flow. If the majority of your revenues come in at the end of the year, the lender wants to know that you can still pay your bills in August. For an established business, the lender will probably ask for three years' of bank statements and cash flow statements.
Collateral
If you are purchasing a building or equipment with the commercial loan you seek, the collateral will be the item you're purchasing. If you default on the loan, the lender can take possession of your store or your backhoe. Just because your purchase can be used as collateral, however, doesn't mean you will automatically get the loan. The lender doesn't want your building or your heavy equipment, they want their money. So they'll be looking at more than collateral.
If you're using the loan for something else, you may still be able to put up something the business owns as collateral, which could help you qualify for the loan.
A commercial lender will look at all of these factors when evaluating your business for a loan. Put your best foot forward by being prepared for these inquiries. Talk to a business like Home State Bank to learn more.
