Written by: Marlene Piche, SVP Head of Branch Banking, Union Savings Bank
What do buying a new property, placing a large inventory order and moving your business location all have in common? Aside from being exciting milestones in the life of your business, these are all scenarios that might require funding from a small business loan. Making big decisions for your business takes a lot of planning, so here are three small business loan tips to make the borrowing process as smooth as possible.
1. Pre-Loan Application Check List
In general, commercial loans are not prequalified, so you should have your financial statements in order and consider how your credit and risk profile will look to a lender before you apply for a small business loan to make the process quicker. The lender will look at your personal credit score, previous loans, business and personal cash flow and how the loan(s) will be used. They want to see that you’re making payments on time and your business and personal cash flow will cover existing and proposed loans. Be proactive in refining your business’s risk profile. If there are any problems with your personal credit score or you have a lot of outstanding loans, try to fix your score and pay off what you can before you apply for your small business loan.
Lenders will also analyze your business. They will consider how long it has been operating, the type of industry it is in and the owner’s experience in the industry, and they will review your business and personal assets. This information is necessary for lenders to fully understand your business and its needs. Remember, this is a transaction meant to benefit your small business, so lenders will need to closely analyze these details to determine what kind of loan and terms are the best fit.
Depending on the type of loan you seek, you will need to provide specific documents and information. This includes but is not limited to business tax returns for the past two to three years, a year-to-date balance sheet and profit and loss statement for the business, purchase agreements, copies of leases, purchase orders, current accounts receivable and accounts payable aging reports, personal tax returns for each owner for the past two to three years and a personal financial statement for each owner.
You should already know how much you need to borrow and what you will use the funds for. Be prepared to explain that to your small business lender and having an idea about the type of loan you need will expedite the application process.
2. Let’s talk about collateral
When it comes to lending, the rule of thumb is that the bank will finance about 75 to 80 percent of the cost as long as the borrower puts in the other 20 to 25 percent.
Typically, loans are secured by the assets that are being purchased. For example, if a landscaper applies for a loan to buy a new truck for transporting equipment, then the truck becomes the asset, or collateral, that secures the loan.
Collateral can also come in the form of other assets such as commercial property, personal residences, savings or investment accounts, vehicles and inventory
Not all businesses have sufficient tangible assets that can be used for collateral. In those cases, the bank will turn to the U.S. Small Business Association (SBA). The SBA offers guarantees for loans where there is a collateral shortfall or insufficient tangible collateral to support the loan, allowing you to get a loan when you otherwise may not qualify. For example, if you own an architecture firm and need a loan but don’t have tangible collateral, you can request a guarantee from the SBA. You will need to complete a few additional forms before your lender can work with the SBA to get you a loan.
You don’t have to figure any of this out alone. Many banks, such as Union Savings Bank, are certified SBA lenders that can help you navigate this process.
3. Small Bank, Big Difference
While big banks may use an automated process to determine loans, small business lending at local banks is customized and personal. Your local bank can offer you all the same services as a big bank while taking the time to get to know you and your small business.
Local lenders will sit down with you and analyze every piece of information you bring to help them get a better understanding of your business. To do this, they’ll need to know what type of business it is, what differentiates your business from your competitors and other information about your industry. Once they understand your small business and where it stands, they can review the reasons you need to apply for a small business loan. The more information you can share, the better the lender will match you with the right loan for you. Be prepared to answer a lot of questions.
Say you need a loan for real estate. You need to be prepared to answer questions such as: are you opening or moving to a new location? If so, why? Will you be occupying the whole facility, or will you rent a portion of it? If you are renting a facility, what percentage of that facility will you be occupying or renting? What are your moving expenses? Will the business continue to operate during the move? If not, how long is the downtime? Again, understanding these details allows lenders to help you find the right loan for your business, so it is best to be prepared to share them during the application process.
At Union Savings Bank, we know your small business is unique, with many nuances that differentiate it from other small businesses in your industry. For your small business lender to understand those nuances, you need to come prepared to answer any questions about your small business’s financial history, current needs and future growth. We don’t want to put you in a box. We want to work with you to find the right fit for you, just like we worked with these small businesses in Connecticut.
At Union Savings Bank, business lending is our business. We want to help you grow your business by providing local business expertise and customized solutions for your small business. Once you’re ready to apply for your small business loan, set up an appointment with our business banking team.
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