Managing Your Financial Health Part III: Business loan applications and what your banker needs to know
In this third installment of “Managing Your Financial Health,” let’s discuss what basic information you will need when you meet with your banker for a business loan. Some of the items below will be actual documentation and some will be verbal discussion items.
Whether you have arranged to meet with your banker at your place of business or in his/her office, the information needed will be the same:
Business plan or loan request: Your meeting will be much more productive for both you and your banker if you have thought through your business plan or loan request thoroughly and in advance. There is nothing wrong with laying out the details of your plan or request on paper. What is the nature of your business? What is the nature of your request? How will the borrowed funds be utilized? How do you foresee managing your repayment plan? What are the specific details of your acquisition, purchase, working capital needs, expansion plans, new venture, etc.?
Who Will the Borrower Be: This will depend upon the type of loan you will need, i.e., business loan to a business entity – LLC, corporation, limited partnership, to you personally – or a non-business, personal consumer loan. Will there be partners, guarantors, co-signers or co-borrowers, etc.? If the borrowing entity is other than a person, the bank will request documentation as to the structure and authority of business entity – articles of incorporation, limited liability company agreement or partnership agreement – and evidence of who will be authorized to take action and commit for the business entity.
Financial information to be requested: The financial information needed will include a sufficiently detailed balance sheet and income & expense statement (profit and loss statement) on the actual borrower; a balance sheet and income statement on any and all guarantors or co-signers; and the most recent two prior years of tax returns for the aforementioned parties. For individual loans, the financial statement is generally prepared on a form which the bank will provide for convenience, although the borrower may use their own form. Business financial statements would generally consist of those prepared internally by the borrower aided by an accounting software program such as Quick Books or other business financial statement software programs. However, depending upon the complexity and size of the borrowing entity, the banker may request audited or reviewed financials statements from an accountant. As a general rule, the banker will request supporting documentation for major assets listed in the balance sheet as well as a description – depending upon complexity this may be verbal or written – of liabilities so as to understand the original purpose and debt service requirements that are currently being managed by the borrower. Supporting documentation to balance sheet items would generally include a detailed itemization of investments, i.e., real estate assets and related liabilities, marketable securities, ownership interests in various business entities, etc. Again, depending upon the complexity of the financial statement(s), the banker will also want to understand any contingent liabilities – indirect liabilities which the borrower may have guaranteed for other borrowers elsewhere.
The required timeframe of your request: Your banker will need to know the timeframe for your business request or personal request. For a general consumer loan request your request should be able to be completed within a fast turnaround, same day or next day, depending upon documentation requirements. For a complex business transaction the time needed by the bank will be longer, i.e., two or three weeks. Example: a real estate transaction will need title work prepared, appraisals and surveys or possibly other types of information and/or documentation to complete the transaction. Understanding your required timeframe will be very important so your banker may meet your need as efficiently as possible.
These items are the normal types of information you should expect your banker to request from you as your loan request is discussed and processed. As was discussed in the last segment of this series, open discussion with your banker will be vitally important as he/she will want to fully understand your need as well as be able to provide meaningful suggestions and direction to you, all aiming to make this as beneficial of a business relationship for both you and the bank as possible.