How Do Banks Qualify Business Loans?
Banks can be mysterious places. Even experienced business owners and senior managers often wonder why they have to provide certain information when they are applying for loans. Seeing the approval process from the banker's point of view helps the business customer understand why she has to give the bank so much information just to renew a revolving credit or take out a term loan.
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Working Capital Problem
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You are the owner of a small business and have deposit accounts with a commercial bank in your community. You have been in business for three years and have not yet needed to borrow money, except for credit cards. Your business is growing, but you are starting to have trouble meeting expenses in the summer months, when business drops off. You try to build up savings to see you through the summer, but you would rather leave your savings alone.
Revolving Credit Solution
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You meet with your banker to discuss the situation, and she suggests a revolving credit facility. She asks for your company's up-to-date financial statement, consisting of the balance sheet, income statement and cash flow statement. She says that she is interested in your monthly revenues during the last two years. She asks questions about your business such as who your main customers are, what competition you are facing and your outlook for business in the upcoming year. She asks for estimates of your sales for the next year. She also asks for your personal financial statement and the latest federal tax return for the business.
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Review Process
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When your account officer receives the information, she reviews it and begins to think that a revolving credit of $100,000 would assist you in "leveling out" your available working capital during the year. She sees that you have a good local accounting firm handling your tax returns and financial statements. She analyzes your business's financial statements and sees a well-managed small business with no apparent problems. Your personal financial statement raises no concerns. Credit reports are positive. She visits your company and asks more questions while you give her a tour of the facility. With no negative information to stand in her way, your banker prepares a loan approval request for the bank's loan committee.
Approval
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The committee approves the request for a $100,000 revolving credit. It will not be secured by collateral, but the bank wants you, as company owner, to guarantee it. The approval is based on the information obtained by your loan officer. They learn that your company is debt-free and that it is operating profitably. Credit information is positive. You are already a deposit customer. Your financial statements are in good order and are prepared by a respected accounting firm. Your business is fairly seasonal, and it is reasonable to add to available working capital by borrowing in the summer months when revenues are lower than normal. The committee expects you to repay any borrowings during the months when revenues are higher. According to all indications, you are serious about running your business properly. The bank is pleased to extend this business credit to you.
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References
- Photo Credit gold bank image by John Sfondilias from Fotolia.com
