Sensible rationale for agreeing to lend money is typically quite clear when you’re the applicant for a loan. As an entrepreneur, you’re confident about the future for your business. You have accepted the risk of devoting your time and knowledge to the venture. With a little more cash, your dreams of greater profitability will surely be realized.
But banks are not confronted with the same risks and rewards as a business owner. A bank lender doesn’t participate in the upside potential of your company. The bank isn’t entitled to a huge payoff by sharing in future profits. Lenders only earn a modest amount of interest. And they don’t even receive that if the business owner’s use of the money fails to deliver cash flow. Your burden as a borrower is demonstrating that your business is worthy of the banker’s risk.
Proving Business Financial History
The common thread woven throughout the money lending process is the bank’s trust in your ability to repay the loan. Walking into a bank unarmed with substantiation of your trustworthiness is a fool’s errand. The loan application process is an informative presentation of facts, not a sales pitch.
When your business is ready to seek a loan, approach the bank with up-to-date accurate financial records. You will not succeed with financial statements that are like an un-watered Christmas tree with its number needles shedding everywhere. Banks are driven by comfort with financial data. They will consider you an unfit risk for borrowing if you don’t have a solid grasp on accounting accuracy.
Key to the presentation of financial records is what to provide. Have the Balance Sheets, Income Statements, and Cash Flow Statements for each of the past three years plus the most recent month-end. Your prior year tax returns – matching the financial statements – are also necessary. These statements reveal profit margins, overhead costs, and cash coverage for loan repayment. Be prepared to discuss these measures of your business and the trends for these numbers over time. Understand each figure and its past fluctuations. Practice sentences that begin with “This loan has a reduced risk because…”
Conveying a Loan Benefit and Repayment
Most crucial to successfully obtaining a bank loan is validating how the bank will be repaid. This is generally a function of how your business deploys the loan proceeds. Therefore, present the borrowing purpose clearly and explain how it benefits your company’s ongoing success. Perhaps the loan permits expansion with new space or equipment; maybe it improves cash flow for accepting more work while waiting on customers to pay for completed jobs.
Whatever the loan purpose, it defines an expected business improvement. You demonstrate the advantages – and thus the loan repayment strategy – with a financial forecast. These projections of future cash flow are often quite simple but occasionally very sophisticated. They are built by using the time and cost for sales to customers, the gross profit on sales, and overhead expenses. Forecasts must be consistent with known facts. Overly aggressive assumptions will doom your bank loan application to denial. If you need help constructing a conservatively believable forecast, rely on an expert for assistance.
The Finance Writer 