By David Dunn, Program Manager, Economic Development Programs, Allentown Economic Development Corporation
As a business undergoing or considering change, whether expanding or consolidating, you need to have cash on-hand to execute your strategy. Your existing cash flow may not be enough to take your plan to where you want it to go. That is where a business loan can be crucial to your businesses success.
Applying for a loan can be stressful. Pulling together the information needed to complete the application is time-consuming, discouraging, and frustrating. It can take you away from running your business and drain your energy. Being well prepared speeds the process and can help reduce your stress.
So, what do you need to do to prepare to apply for a loan? Before you put pen to paper you should spend time gathering information and preparing for the larger broad questions that are often asked about your business. Here are some things you should have and should do:
- Are you formally incorporated as an LLC, C, or S-Corp? If not, you must obtain legal business status, through a State application. Be sure to use an attorney to do this. If you are in a partnership, is the fictitious name filed with the State, and do you have a formal agreement for your entity? Is your status current, and can you obtain a certificate of ‘good standing’?
- Do you have a DUNS number? It is a unique nine-digit identification number, for each physical location of your business. If not, apply for free through Dun & Bradstreet. Lenders use DUNS numbers to run your business’ credit report.
- Do you know your NAICS code(s)? According to the SBA website, The North American Industry Classification System (NAICS) classifies business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. economy. The NAICS industry codes define establishments based on the activities in which they are primarily engaged. You can go to NAICS.com and search for yours free of charge. These codes are helpful because they let the lender compare your performance against industry standards.
Accurate and current financial statements:
- Whether cash or accrual-based, monthly Profit/Loss (P/L) and balance sheet statements demonstrate that you closely manage your business. You should make sure your P/L Cost of Goods Sold is accurate and account for all costs directly related to producing your product or providing your service. You need to make sure that expenses like payroll and associated taxes, utilities, rent, insurance, etc. are present and charged for their applicable period(s).
- Your Accounts Receivable (A/R) and Accounts Payable (A/P) registers should be current. Be prepared to explain any A/R or A/P balances 90 days and beyond.
Business and personal financial statements and tax returns:
- Providing two-to-three years of both sets of statements and returns is standard. If your business is new, you can only produce what you have. Accountant-prepared fiscal year-end financial statements for taxes should match the tax returns and, LLC/S corporate income should flow and match personal statements and returns. If you file taxes jointly, you need a separate statement if your spouse is not going to be part of the loan application.
Current and projected cash flow statement:
- This information confirms that you have the current and future projected cash to pay for the monthly cost of the loan. Typically, future projections extend out two years.
- Cash flow statements should be conservative and defensible based on your projections. Assume higher costs and inflation factors where appropriate.
- Unless you own substantial liquid business assets outright, you need to expect that lenders will request collateral from outside the business – i.e. personal guarantees from all stakeholders.
- You should be upfront and clear with your spouse/partner about this. You are leveraging your personal wealth against the prospects of your business’ success.
Outside of the traditional information above, borrowers should prepare for the following questions, directly or indirectly, as they are often asked. Think of these as a different type of business plan, one that successful owners regularly answer:
- Will this loan help my business reach a goal or solve a problem that is holding me/us back?
- Do I have what it takes to financially support the loan?
- Are my business systems, procedures and prospects in place to utilize the funds productively and profitably?
- Do I have the processes, controls, software, and manpower to manage this?
- Will I need to hire people and have I factored in the true, total cost of hiring/training, including wages and benefits?
- How much time/effort is required to bring a new piece of equipment online and into production generating revenue? Will this equipment lower my costs, increase my production or both?
- Following the plan using the Business Model Generation as a template, can you clearly and concisely explain:
- The purpose of your business – what unique value-added proposition do you offer?
- What key activities do you engage in to generate revenue?
- Who are your key partners?
- What are the essential resources you need to run your business?
- Who is your target customer and where is your target market? Is it growing or shrinking?
- Who are your competitors and what are the barriers to new competitors entering your market space?
- What channels do you employ to reach your customer – direct/internet/referral sales?
- Looking at your management expertise, what is your industry experience and management background? Do you have access to expert resources that can assist/partner with you?
- How is your business structurally organized? Who are your key employees, and how long and how much experience do they have in your industry?
As you can see, applying for a loan is more than just paperwork. You need to gather accurate and consistent information and assess and confront your business strengths and weaknesses in real time. Your loan application is a step and part of the plan to pursue new opportunities that will help grow your business.