Commentary: Commercial credit for small businesses (8040)

The need for financing is a critical and ongoing concern for the owners of small businesses. Indeed, few things are as crucial to the health of a small business operation. Many small businesses are launched by the personal resources of their owners, but can quickly reach the stage where the owner must look to the credit markets for financial help in expanding operations. The banking industry is an important source of working capital.

Entrepreneurs may not realize that applying for commercial credit is a more customized process than obtaining consumer credit, and requires a great deal of preparation by the business applicant. This article is meant to help to de-mystify the process and improve your chances of getting the credit you need.

The Credit Application Process

Applying for commercial credit can be tedious. It calls for more documentation than you might initially have expected and certainly a lot more than when you apply for consumer credit. For lenders, extending credit to an entrepreneur usually means customizing the loan to suit the credit needs of that business. So don’t be disheartened by the amount of paperwork needed to accompany the application. Instead, be prepared!

Among the best assets you can bring to the lender is a well thought-out and documented business proposal. You need to clearly state the purpose of the loan (will the money be used for temporary working capital, buying equipment, or expanding facilities); the amount of funds needed and for how long; and the repayment schedule. Your business proposal should include the following information:

* Business description that tells the nature of the business, describes the product and its market, identifies its customers and competition.

* Personal profile that outlines the background and experience of each of the principals in a resume.

* Proposal that states the type of loan requested and its purposes.

* Business plan that outlines your corporate strategy for the next three to five years; it will aid you and the lender in determining whether the business will generate the cash flow needed to repay the loan.

* Repayment plan that tells how you propose to repay the loan or outlines a repayment schedule. The lender will be expecting you to repay the borrowed funds from the profits produced by the business. As a contingency, you might need to develop a plan on how you would repay the loan if the profits alone turned out to be inadequate.

* Collateral that you will use to secure the payment of the loan. Collateral can include business and personal assets such as inventory, equipment, and accounts receivable or real estate, stocks, bonds, and automobiles.

* Financial statements, both personal and for the business. The business financial statement should be provided for the last three to five years of operations including a year-to-date interim report. It should contain a balance sheet showing business assets and liabilities, and a profit-and-loss statement showing revenues and expenses. Be prepared to provide copies of tax returns for the business for this same period.

The personal financial statement should list your assets and your liabilities. Identify the names in which title to each asset is held and its fair market value.

You should be prepared to provide copies of your personal tax returns and you may be asked for a list of credit references. Lenders will check your personal as well as your business credit rating.

Lenders will carefully examine your financial statements and business projections. As a borrower, you must be fully prepared to answer questions about them. Personal guarantees of the owners or other principals usually are required, even from an established business.

The lender also may request another party’s guarantee such as a cosigner or a surety, or may request a government guarantee from the U.S. Small Business Administration or other government agency.

In the case of secured credit, the lender is allowed to obtain a spouse’s signature on certain documents when the applicant offers, as security for the loan, property that the two own jointly. In this case, the spouse or other co-owner may be asked to sign documents, such as a mortgage or other security agreement that would be necessary under applicable state law to make the property available to satisfy the debt.

Sources Of Technical Assistance

Before you approach a lender, you might want to seek the advice of another, more experienced “set of eyes” to review your business proposal, particularly if you are a first-time borrower. By doing so, you’d be getting the loan package in shape to make it easier for the lender to reach a favorable credit decision.

A qualified counselor might even discover that you really don’t need more money, and instead suggest better inventory control, improved marketing techniques, or other changes that could actually solve your growth problems.

Once you are satisfied that your proposal is in good shape to present to a lender, set up an appointment to discuss your application. You will find that the lender can also be an excellent source of business and financial counsel.

If Your Application Is Not Approved

If your application for credit is not approved, find out the reasons why. Some of the reasons that lenders often give for denying a business loan include, for example, insufficient owner’s equity in the business; lack of an established earnings record; a history of slow or past-due trade or loan payments; or insufficient collateral. Finding out the reasons why your loan was not approved may help you qualify the next time you apply.

Gaining access to the credit your business needs to grow can be a time consuming, tedious process. However, successful completion of the process and the acquisition of additional funding may be the catalyst your business needs to take it to the next level.

Thomas L. Wolf, CPA is a partner with Mengel, Metzger, Barr & Co. LLP. He specializes in working with closely-held companies in the service, manufacturing and construction industries.