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How to get a commercial loan

In this punishing business environment, getting a commercial loan can be a challenge. While lending institutions are in the business of extending loans, they will steer clear of companies they deem to be risky investments.

Companies with questionable track records, or new businesses, which have no track records at all, will likely face an uphill battle in securing a commercial loan. However, there are steps you can take to improve your chances.

In considering an application for financing, banks, credit unions and other lending institutions will look at a company’s credit rating, capacity to repay the loan and collateral, which refers to assets the lender can recover in case the borrower defaults on the loan. Business or personal assets can be used as collateral; borrowers that do not have sufficient collateral to pledge will need a co-signer that can put up assets.

To determine a business’s ability to repay, the lender will look at the company’s cash flow by examining past financial statements. For companies that have been posting profits consistently for several years, the profits may be enough to cover the additional debt. However, startups or businesses with red ink on their books will have to come up with a compelling case for how the loan will be repaid.

Prepare for appointments with lenders by creating a well-organized business plan that projects your company’s revenue goals three to five years into the future, and how you propose to meet those goals. The business plan should detail your company’s product or service, with a focus on benefits to the customer. The plan should feature a market analysis that shows who and where your customers are and how you intend to reach them. It should also describe the organization’s structure while giving details on the management team and each individual’s responsibilities. Budgets and projected profit and loss and cash flow tables should be part of the package, as well. Preparing a business plan is a valuable exercise for any business owner, as it forces you to plan ahead while also giving you a better idea of how much money you will need to borrow.

Find out which documents the lender requires, such as the company’s financial statements and tax returns, as well as the owners’ personal financial documents. It’s also a good idea to do your own credit check before applying for a loan. By obtaining reports from a couple of major credit bureaus, you can see what will come up when lenders check your credit. Sometimes, credit reports contain errors that can be corrected, or they are lacking more current information that will paint a better picture of your credit history. If the credit reports point to a problem that has since been rectified, you can include an explanation when you apply for a loan.

Besides capacity to repay and collateral, lenders will consider an owner’s experience and level of expertise in the given industry. For instance, an individual with no restaurant experience who is looking to open a restaurant will have considerably more difficulty securing a loan than a seasoned restaurateur. Lenders will not only look at your experience and education, but that of your managerial team, as well.

Equity in the business and its relation to debt is another important factor. The more invested an owner is in the company, the more attractive the company will be to lenders. If your company has a high ratio of debt to equity, your business may be best served if you seek equity financing rather than debt financing.

Equity financing refers to funds that a company raises in exchange for ownership shares in the business. To obtain equity financing, you can approach nonprofessional investors, such as friends and family members. Or your company may be in a position to attract an investment from venture capitalists, which typically focus on early-stage, high-potential, growing companies. Many venture capitalists focus on a particular industry, such as technology or pharmaceuticals, and larger investments.

Another possibility is angel investors, who are high-net-worth individuals that also provide capital for early-stage businesses. Angels typically are more willing than venture capital firms to make smaller investments.

Once there is a sufficient amount of equity in your business, you can seek debt financing. If you already have a relationship with a bank or credit union for other areas of your business, that’s a good institution to contact first. Lenders are more likely to extend financing to companies with whom they have a good relationship.

If you are turned down by the first lender you meet with, don’t give up. Some financial institutions have more stringent criteria than others. Some banks are more willing than others to work with small companies and smaller loans. Look for a bank that has a portfolio of businesses that are about your size.

In recent years, credit unions have become more involved in the commercial lending arena. Credit unions are open to a certain field of membership, which is often a particular geographic area. Over the past couple of decades, credit unions have seen their fields of membership expand greatly, and many credit unions in this area welcome as members anyone who lives, works, worships or attends school in a broad geographic area.

With an eye toward building relationships, the best time to borrow money is when you don’t need it. Taking out a small loan and making payments on time will give your business a good credit history while allowing you to develop a relationship with a lender.

About Bernadette Starzee