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Before a bank lends you money for your company, it is going to want a lot before they give it to you. Here will discuss what you need to expect a bank to ask when you apply for a commercial loan for your business. There are some exceptions to every rule, but they are generally the rules are as follows.
Collateral
Banks do lend money to startups. One exception to the rule is that the Small Business Administration has programs that guarantee some portion of startup costs for new businesses so banks can lend them money with the government, reducing the risk for the bank.
Your business must have hard assets it can pledge to back up the business loan. Banks look at the assets to make sure that they will reduce the risk. For example, if you pledge accounts receivable to support your commercial loan, the bank will check the major receivables accounts to make sure those companies are solvent. They will only accept a portion of receivables to back a loan.
The need for collateral also means that most small business owners have to pledge personal assets, usually house equity, to get a business loan.
Business Plan
The majority of commercial loan applications require a business plan, but there are some exceptions. Banks will want the standard summary of company, product, market, team, and financials.
Business Financial Details
Your business’s financial details include all current and past loans, and debts incurred, all bank accounts, investment accounts, credit card accounts, and supporting information such as your tax ID numbers, addresses, and other contact information.
Complete Details on Accounts Receivable
This includes again account-by-account information and sales and payment history.
Complete Details on Accounts Payable
This includes most of the same information as for accounts receivable and they will want credit references, companies that sell to your business on account that can vouch for your payment behavior.
Complete Financial Statements
The balance sheet has a list to all your business assets, liabilities, and capital, and the latest balance sheet is the most important. Your profit and loss statements should go back at least three years but there are exceptions made if you do not have a history that long, but you do have good credit and assets to pledge as collateral. You will need to supply as much profit and loss history as you have.
Having “audited” statements means you have paid some money to have a CPA go over them and take some responsibly for their accuracy. The bigger your business is, the more likely you have audited statements ready as part of the normal course of business for reasons related to ownership and reporting responsibilities.
Having statements reviews is cheaper because the CPAs who review your statements have less liability if you got it wrong. Banks will not always require audited or even reviewed statements because they always require collateral, assets at risk, so they care more about the value of assets you pledge.
Personal Financial Details
Your personal financial details include your social security number, net worth, details on assets and liabilities, such as credit card accounts, your home, auto loans, and more.
For businesses with multiple owners or partnership the bank will want financial statements from all of the owners who have significant shares.
Insurance Information
Banks will often ask businesses that are newer that depend on the key founds to take out insurance against the death of one or more founders.
Copies of Returns
Banks will also want to see the corporate tax returns.
Agreement on Future Ratios
Most commercial loans will include loan covenants where the company agrees to keep some key ratios – quick ration, current ratio, and debt to equity within certain limits. You are defaulting the loan if your financials fall below those specific levels in the future.
