Applying for a Loan Lesson 2

Applying for a Loan

This course will review the loan application process and provide you with a comprehensive checklist, which includes reviewing the loan application form, preparing resumes and a business plan, and preparing and submitting your business credit report, income tax returns, financial statements, AR/AP reports, and other collateral and legal documents.

Credit Factors

There are several critical factors that go into determining your credit worthiness for a loan. This course reviews types of equity, earning requirements, working capital, collateral, and other assets and factors to consider when applying for business credit.

Microloans and More

An overview of microloans – loans up to $50,000 to small businesses and certain not-for-profits, Venture Capital – a type of equity financing that addresses the funding needs of entrepreneurial companies that for reasons of size, assets, and stage of development cannot seek capital from traditional sources, and Angel Investors – high net worth individual investors who seek high returns through private investments in start-ups.

**DISCLAIMER: NOT ALL COURSES ARE REQUIRED. PLEASE FEEL FREE TO TAKE ONLY THOSE COURSES THAT INTEREST YOU.

Of course, each loan program has specific forms you need to fill out. But for the most part, you’ll need to submit the same types of documentation. So it’s a good idea to gather what you’ll need before you even start the application process.

Here are the typical items required for any small business loan application:

Equity Investment

Business loan applicants must have a reasonable amount invested in their business. This ensures that, when combined with borrowed funds, the business can operate on a sound basis. There will be a careful examination of your business’ debt-to-worth ratio to help all parties understand how much money the lender is being asked to lend (debt) in relation to how much you have invested (worth).

Owners invest either assets that are applicable to the operation of the business and/or cash which can be used to acquire such assets. The value of invested assets should be substantiated by invoices or appraisals for start-up businesses, or current financial statements for existing businesses. This value is also known as equity investment.

Types of Equity

  • Strong equity investment shows a lender that you are fully committed to the business.
  • Sufficient equity is particularly important for new businesses, to convince the lender that you are serious.
  • Weak equity will make a lender more hesitant to provide any financial assistance. However, low equity in relation to existing and projected debt (your current obligations plus the new loan) can be overcome with a strong showing in all the other credit factors.
  • Non-existent equity can make obtaining a loan almost impossible, as you have not shown commitment to your business by investing your own money or assets in it.

Earning Requirements

Financial obligations are paid with cash, not ‘on paper’ profits. When cash outflow exceeds cash inflow for an extended period of time, a business cannot continue to operate. This means that cash management within your business is extremely important. In order to adequately support your company’s operation, cash must be at the right place, at the right time and in the right amount.

The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan before making funds available. Payment history on existing credit relationships (personal and commercial) is considered an indicator of future payment performance.

Applicants are generally required to provide a report detailing when their income will become cash and when their expenses must be paid. This report is usually in the form of a cash flow projection, broken down on a monthly basis and covering the first annual period after the loan is received.  A critical factor in loan approval is making sure the lender understands how these revenues will be generated.

    Working Capital

    Current assets are the most liquid of your assets, meaning they are cash or can be quickly converted to cash. Current liabilities are any obligations due within one year. Working capital measures what is leftover once you subtract your current liabilities from your current assets, and can be a positive or negative amount. The working capital is available to pay your company’s current debts, and represents the cushion or margin of protection you can give your short-term creditors.

    Collateral

    Collateral is an additional form of security which can be used to assure a lender that you have a second source of loan repayment. Assets such as equipment, buildings, accounts receivable, and (in some cases) inventory are considered possible sources of repayment if they can be sold by the bank for cash. Collateral can consist of assets that are usable in the business as well as personal assets that remain outside the business.

    Owner-occupied residences generally become collateral when:

    • The lender requires the residence as collateral
    • The equity in the residence is substantial and other credit factors / sources of collateral are weak
    • Such collateral is necessary to assure that the principal(s) remain committed to the success of the venture for which the loan is being made
    • You operate the business out of the residence or other buildings located on the same parcel of land

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