By Ellen Chang
December 13, 2018
The more prepared you are before applying for a bank or SBA loan, the better. (Photo credit): Gettyimages.com/kate_sept2004
Timing and preparation are key to a successful business loan application.
For growing businesses, a loan provides the financing needed to expand locations, purchase real estate, or stay competitive. This is why it is crucial for businesses to prepare for the application process well in advance, so that capital is available when needed.
Instead of using credit cards or other high-interest debt, a conventional or Small Business Administration (SBA) loan from a bank will provide more flexibility in terms of loan terms, liquidity, and interest rate.
“The survival and growth of small businesses depends on access to credit,” says the Federal Deposit Insurance Corporation (FDIC) in a recent report which surveyed 1,200 US banks.
Business owners who are prepared on the information and data needed for a commercial loan can help expedite the process, says Mark Koshnick, senior vice president and head of Central Texas commercial loans at East West Bank.
Loans are a way for companies to take advantage of market opportunities, emerging markets and weaker competition by acquiring them or seeking vertical integration opportunities, he says.
“Some business owners are so low on debt that they lose opportunities to grow,” Koshnick says.
A banker can show an owner how the business can improve cash flow and reduce costs, such as buying a building instead of paying rent or owning assets, which can be tax-efficient, a- he added.
Here are six tips for homeowners before applying for an SBA or bank loan.
1. Prepare early
Start by preparing three months to a year before you need to apply for a loan, depending on the goal.
Entrepreneurs who need to purchase new or used equipment to grow their current business should start three to six months in advance, Koshnick says. A landlord considering buying a building or other property should start preparing 12 months in advance.
Planning ahead gives owners the opportunity to clean up their balance sheet, pay overdue suppliers and other loans. Existing debt with banks or alternative lenders can easily take 12-24 months to be paid off or lower.
“Banks like to see companies with healthy balance sheets that show equity because not all profits have been distributed,” he adds. “Minor mistakes can add up quickly.”
2. Understand the different types of loans
Some business owners are reluctant to take on debt because they have misconceptions about repayment obligations, shares Koshnick. Understanding the ins and outs of loan terms and interest rates can help alleviate underlying fear.
When businesses are profitable, they should start planning… Waiting until there is a drop in revenue or losing a big customer is not a good plan to get a loan.
(Photo credit): Gettyimages.com/HeroImages
Longer-term loans, such as home loans with repayment periods of 20 to 30 years, or the refinancing of current loans allow a “little cushion” for economic cycles, he says.
While a line of credit requires repayment within one to three years, an equipment loan is often 3 to 10 years.
“A banker can help an owner model financing scenarios and perform break-even analysis to determine what type of loan is best for their business,” Koshnick says.
3. Consider SBA Loans
SBA loans are federally guaranteed, which means down payments are lower and usually between 10-15%. That’s attractive to landlords, says Alex Chang, vice president and Houston area manager at East West Bank.
While some people mistakenly believe that getting approved for an SBA loan is a lengthy process, many take the same amount of time as a standard conventional bank loan, he says.
Receiving approval for an SBA loan also means that real estate appraisals or environmental surveys only need to be done once before the loan is approved, unlike a conventional loan which might require appraisals each time. are approved or as often as every 3-5 years. . Assessments and surveys are time-consuming and expensive. Real estate appraisals and environmental studies can easily cost between $5,000 and $7,000 each time they are done.
“With SBA loans, you do the assessments and surveys once, and almost any for-profit industry can qualify, although there are a few exclusions,” Chang says. “If you’re a family business trying to get started, SBA loan maturities are 25 years instead of 3-5 years.”
Although closing costs are higher than a bank loan, the advantage is that the federal government guarantees the loan, encouraging more banks to offer it and absorb the risk.
Another benefit is that if your business is profitable after the first five years, SBA loans don’t have a prepayment penalty, he says.
The amount of an SBA loan can range from $100,000 to $20 million, depending on the structure of the loan. “SBA loans are very good for small businesses and homeowners who depend on them for their livelihoods,” Chang says.
Homeowners are only eligible for SBA loans if the property they are buying is 51% owner-occupied, which means it cannot be an investment property.
4. Discover the advantages of traditional bank loans
One factor that business owners may not be aware of is that conventional bank loans require larger down payments, depending on the industry. The typical down payment is 20-50%.
Loans to buy hotels and other volatile assets, such as commercial or multiple buildings in a mall, for example, typically require a down payment of 40-50%. This amount may be more than some homeowners and investors can afford, who may not be prepared for these numbers when looking for a loan. “I had a small business owner who wanted to buy an apartment, and he didn’t know about the down payment requirement for commercial property,” Chang says. “Other landlords aren’t aware that they need enough cash flow and a large, consistent number of paying tenants whose contracts aren’t expiring soon.”
5. Document your cash flow
While many entrepreneurs have adequate financial statements prepared by public accountants, certain attempts to lower their tax rate can affect their chances of getting approved for a loan, Chang shares.
“I’ve seen many potential clients get very creative with their financial statements to save money on paying taxes,” he says.
When homeowners don’t report all of their cash flow and income on their financial and tax statements, the likelihood of receiving loan approval decreases, Chang says. Banks generally want a company’s income to cover expenses in a ratio of 1.2.
“When the company has a ratio below 1.2 because its CPAs have deducted too many expenses, that’s too high a risk for a bank,” he says. “That may be kosher for the IRS, but not kosher enough for a loan.”
Expect a bank to require three years of tax filings to ensure a company’s earnings meet the minimum threshold.
Another factor bankers look at is accounts receivable. If a supplier accounts for 20% or more of what it sells, a sharp drop in revenue is a likelihood, Chang says.
“Banks like companies that have a good customer base, including national brands,” he says.
6. Find the right timing
When businesses are profitable, they need to start planning ahead and reviewing their current business plan and strategies to grow and increase revenue. Waiting until there is a drop in revenue or losing a big customer is not a good game plan for getting a loan.
“When companies are in a good period, management should start preparing for a drop in cash flow and get a line of credit,” Chang says. “When your business cash flow is good, be prepared for things to go wrong. Don’t let your pride get in the way and believe you can weather the recession because when the cash is gone banks can’t approve a loan.
Learn more about how SBA loans can help your business grow