By: Bruce Sattin
Many small business owners only have experience in applying for a home mortgage or car loan. Business loans are quite different, and the process in applying and obtaining approval requires much preparation. Banks have separate divisions that process and approve business loans, and the loan officers that handle business loans usually do not get involved in home mortgages. The loan officer at the bank branch that processed your mortgage will likely not be involved in a business loan application other than to refer you to a commercial lender.
Before applying for a loan, however, the business owner should organize the information the bank is going to require. Here are some tips:
- Financial Information: The first thing a loan officer will want is evidence of the financial strength of the borrower. Assemble 3 years of balance sheets, profit and loss statements, and business tax returns. Almost all small business loans require the personal guaranty of the principals of the business, so include your last 3 federal income tax returns as well. The bank will also want you to complete a personal financial statement, a form that they can provide. Your accountant may be able to assist in assembling this information.
- Business Plan: The bank will want to know the details of your business – what it does, who its customers are, what goods and/or services it provides in what territories, and what it intends to do with the funds it is borrowing. The more specifics of the nature of the business and its historical operations you can provide, the better.
- Collateral: All business loans require collateral. The best collateral is real estate, especially if the business operates from a building or office that it (or its principal) owns. Banks will usually lend about 70% of the appraised value of real estate collateral if they get a first lien on the property. Some businesses
operate from leased space, so their collateral would be bank accounts, fixtures, equipment, inventory, works in progress, and current accounts receivable (no more than 60 days old). Banks usually lend 50-60% of the estimated value of these types of collateral. Be prepared to provide the bank with a detailed accounting of business assets that might be pledged as collateral for a business loan.
- Liabilities: The bank will want to know who else the business owes money to, including loans from the owners of the business. Prepare a list of all loans
outstanding, such as trade debt, credit card accounts, mortgages, equipment loans and leases, accounts payable, tax debts, and the owner loans. Indicate if
any of this debt is going to be paid off from the loan being requested.
- Professionals: Banks expect a business enterprise to have professionals involved in its operations. The bank will want to know who your accountant is
(preferably a CPA). Most bank loans require an opinion letter from the attorney for the business (stating, among other things, that the business is in good standing and that the proper persons are signing the loan documents). An experienced business attorney will be invaluable in assisting you in providing the due diligence the bank will require once the loan is approved, such as your business organization documents, title searches, lien and judgment searches, surveys, etc.
- Closing: Depending on the size of the loan, the bank will either prepare loan documents using its own standardized documents or engage an independent
attorney to prepare the documents and conduct the closing (at your cost). Smaller banks usually close loans under $500,000 in-house. Large banks often close loans up to $1,000,000 in-house. You will be expected to have your attorney at closing and a title company if real estate is part of the collateral.
- Timing: Expect the application process to take about 6 weeks. Loans with Small Business Association guarantees (SBA Loans) take longer, but have advantages for small businesses in that government guarantees take a lot of the risk away from the banks and allow businesses without substantial assets to obtain loans.
The lesson to take away is that preparation and planning will result in a much smoother loan process and greater likelihood of approval. Get your ducks (and your accountant and lawyer) in a row before you initiate the process with a commercial loan officer at the bank of your choice.
Bruce Sattin is Partner in the firm’s Business Department assisting his clients with commercial real estate transactions, zoning and land use, general business and corporate law, trusts and estates and bankruptcy law. To contact Bruce, call (609) 275-0400 or email him directly at firstname.lastname@example.org.