How to prepare for a small-business loan

Guest post by Richard Gray, Senior Vice President, Commercial Lending, Bank of American Fork

With the economy leveling out in slow, steady growth, many businesses are thinking about how to grow. After a few years of focus on the basics to keep strong enough to weather the economic storms, business owners are ready to move forward at a good time for expansion, when the market isn’t yet up to pre-recession levels.

However, many businesses don’t have the capital they need for growth, which, combined with low-interest rates, makes it a good time to consider a small business loan. I would recommend reviewing the following to prepare for financing.

Get to know your loan officer. It’s important to develop a relationship with your lender and the loan officer you work with. When your lender knows who you are, they can help you find the financing option that fits your business the best. Find a lender that cares about your business and wants to know more than just the numbers.

Prepare or update your business plan. Lenders want to be sure you have a plan for your business’ success, and they want to know what it is. Update your company’s goals and financial projections and your lender will have something to use when they consider how financing will help you in the long- and short-term future. Your business plan should address the best- and worst- case scenarios. You should include the following elements outlined by the U.S. Small Business Administration:

• Begin with a statement of purpose. You should be able to explain your business in 25 words or less.

• Illustrate how your business will work and why it will be successful. List the owners.

• Describe the company’s products or services, the customers, the market and the competition. List the managers and their credentials.

• Supply three years of projected financial statements. Include income, loss and cash-flow projections.

• Provide supporting documents, such as references from creditors and potential clients and suppliers, and evidence of insurance.

Evaluate your financial fitness. This is an area where your loan officer will be helpful to you. You may not even know what it means to be in good financial shape for a loan. Every business and every borrower has a different situation, so there isn’t a set, simple checklist. Some lenders will look at length of time in business or net worth, but you can find lenders, especially at community banks, that will look at your business beyond the numbers. It will come down to whether or not the applicant is likely to and capable of replaying the loan. Some questions to consider:

• Does the business make conservative or risky financial decisions?

• Is the business owner conservative with personal finance?

• Will the business owner sign a personal guarantee?

• Is there a strong base of capital available for collateral for the loan?

• What is the business’ margin of error for the expected growth?

• What is the back-up plan in case of a situation that threatens the business’ financial structure?

• Have you developed at least two ways to repay the loan?

Know the types of financing available. There are different types of loans commonly used by small businesses. A few months ago, I talked about the benefits of buying your office space, and mentioned some of the types of financing available.

SBA-guaranteed loans are specifically designed to help companies grow and prosper. They are guaranteed by the SBA, meaning the business is more likely to be approved for attractive rates and financing, since the risk is shared between the lender and the SBA. They are less capital-intensive, usually requiring just 10 to 20 percent down, versus 30 to 35 percent down for conventional loans. If you’re worried that your business may be too big to qualify for an SBA loan, know that a small business is defined as having less than 500 employees and less than $7.5 million in annual revenue, depending on the industry. Ninety-five percent of Utah companies are eligible. Look for an SBA Preferred Lender, since these types of lenders can approve your loan faster than non-preferred lenders.

Conventional loans require a larger down payment than an SBA loan, but with historically-low interest rates and property values, now is a good time to consider expanding. A business line of credit is good for short-term cash needs like building up inventory and funding accounts receivable. Business term loans allow a certain dollar amount to be repaid in installments over three or more years, and are commonly used for purchasing equipment, vehicles, furniture, renovations, expansion or commercial mortgages.

Personal lines of credit, like credit cards or home equity lines of credit, are convenient, but can be risky. Credit cards have high interest rates and can negatively impact personal credit. Home equity loans use the borrower’s home as collateral. However, this model allows the company to utilize its capital to grow the business and gives the owners an opportunity to increase and diversify their personal wealth with commercial real estate.

Small business loans are the key to keep communities growing and people working. If you feel overwhelmed by the loan process, use this guide to prepare. Community banks and other lenders want to lend to Utah’s businesses. Loan officers are there to help you figure it all out and grow your business.

This article first appeared in The Enterprise.

Richard Gray is senior vice president of commercial lending and SBA lending at Bank of American Fork, Utah’s community bank leader, an Equal Housing Lender and Member FDIC. Richard also manages the bank’s Murray branch, and he has assisted local small businesses in obtaining SBA funding for more than 25 years. He serves on the board of directors for nonprofit Kostopolus Dream Foundation and was the chairman for nonprofit Utah Microenterprise Loan Fund, Salt Lake City.

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