Whether you’re looking to expand your business, acquire an existing company or are considering refinancing existing debt, preparing a complete and useful application for your bank is an essential first step.
In analyzing the 5 Cs of credit – credit history, capacity, collateral, capital and conditions – banks use a variety of calculations, ratios, and analysis methods, all of which vary by bank and loan officer. Additionally, all banks have different credit standards and tolerances for varying loan types.
However, providing the bank with accurate financial statements, projections and supplemental data not included in standard financial reports is a universal necessity for all companies.
The loan officer must feel confident in the validity of the data and be able to rely on the information when making credit and loan term decisions. Additionally, the bank will want to ensure you are considering how the proposed transaction will affect your overall financial position, including tax and estate planning.
As the borrower, your goal is to receive the fastest, most beneficial loan approval offer from the bank. In order to move that timeline to completion you will help the lender, and therefore yourself, by providing the most complete application package you can provide. If your request is to expand your business or acquire another business, your CPA can help you present these scenarios to the bank. With your input, in a narrative format, you can indicate how the additional building or equipment will increase efficiencies – try to state specifically how – add or remove labor costs, increase debt service, software support, maintenance expense, taxes and insurance costs, etc.
The one thing that will be very helpful to your banker is a cash flow budget. Preparing this, with the assistance of your CPA, on a pro-forma basis by month for the upcoming 12-month period, will document what the impact to cash will be from the proposal you are presenting. The cash budget will show when various expenses will hit your bank account, what impact sales on credit terms which will have on your cash needs, what impact inventory increases and capital purchases will have, what costs credit card sales are for you, and how best to schedule your new loan for repayment. This cash flow budget may also bring to light whether or not an operating line of credit, or an increase to an existing line of credit, should be considered as part of the loan request.
Ideally, the lender also should receive from you and your attorney an explanation of how you plan to own any new assets, i.e., do you intend to create a new entity, S-Corporation, limited liability company or to lower tax impacts or reduce liability concerns. If purchased in a new LLC, a new building can be used to create estate planning opportunities with planning assistance from your financial professional.
Another issue to consider that is often overlooked by borrowers is the potential need for additional life insurance. Your expansion or acquisition will cause debt levels to increase, thereby increasing risk at least in the near term. An unexpected death of the owner or key management personnel could cause undue pressure on the business or surviving spouse. A short meeting with your financial advisor should ensure that you have adequate levels of life insurance in place.
Bankers receive loan requests with a wide variety of levels of preparation. I’d suggest those requests that show attention to addressing the concerns of a lender will move more quickly and successfully from the stack to loan closing.
Micah Scott is vice president of small-business banking for Guaranty Bank. He can be reached at mscott@gbankmo.com.[[In-content Ad]]
