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Business Lending Basics
by Cynthia Lamberson
June 13, 2024
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So you have a business, and you are looking to obtain a loan? To some people that’s a scary thought. To others, they think it’s a guaranteed process. I can assure you it is not guaranteed, but it also does not have to be scary. Either way, it is possible to obtain a loan with the proper preparation and resources.

I remember the first business loan application I accepted as a Business Banker. I was full of hope and anxiety for my customers. I started doing commercial lending to help businesses grow and achieve their goals. I knew I would be an integral part of helping their business grow, and I did not want to let them down. As a young banker I was truly disappointed to find out that my first customer would not be approved for their loan. The hardest part for me was that at the time I really didn’t understand why they weren’t approved. After all, in my eyes they had a great business!

During the first couple years of my business banking career I got my heart broken a lot when it came to approvals. I believed in my customers businesses, them personally and their lending requests, often to find I wasn’t getting the approvals we needed to get them funded. I remember the day I had to flip my thought process, for both my sake and my customers. All the while believing in my customers dreams, I also had to help them more, and by help them, I needed to educate them to become lendable. It took me a while to figure out what that truly meant and how spending time preparing prior to application would help my customers the most. I had to take a look at multiple institutions including my greatest competitors and figure out what they look for when it comes to being “lendable”. This may have been the biggest feat of all, because not every financial institution is one size fits all and neither is every business.

So what are some things that you should do when looking for business lending?

Start Early

Business Lending can take time. Make sure that you understand that gathering documentation and preparation may not give you an overnight lending decision. If you are starting a new business, lenders may look for you to have a solid business plan in place. If you’ve ever written a business plan, you know that researching different aspects of your plan take time, effort and resources. So how do you get help with those items and where do you start? Find a mentor.

Find a Mentor

A mentor can be one of several people. As business owners I always felt you should have your circle of advisors; A good CPA, A trusted Legal advisor, A trusted Banker/Financial advisor, Fellow entrepreneurs, my newest friend in the circle - a talented web designer and the final person in our circle - a business mentor through SCORE. SCORE to me has always been our best resource for individuals who are looking to start or grow their business. They offer free business advisor services that help you organize this process and work with your current circle. With everyone’s situation being different, having a business mentor will help not only organize your goals and thought process, but keep you on track to achieving them in a realistic and effective way. SCORE mentors are also there to help network the rest of your circle. If for some reason you need help with finding a part of your circle. They may be able to point you in the right direction of your search. If you have a mentor, you have someone that has resources to help you save time, money and efforts through your process. In my opinion, this is the most valuable asset you have in your business.

Check Your Personal Credit Health

When is the last time that you pulled your personal credit report? Many people do not know that your personal credit impacts your ability, in most cases, to apply for business credit. There are a few quick tips to improve your credit. First, make sure any and all collections are paid. Make sure that you have been on time with payments for ideally 2+ years, your revolving debt is low and under 30% of available credit and you understand what factors affect your score-both positively and negatively. Does it show that you have some credit experience? Although not a requirement, a majority of lenders like to see you have some sort of credit experience on your report. If you have some, you can prove that you are able to obtain and pay as agreed.

Business Documentation

I often find when working with new businesses that they have not filed for their business entity name or Tax ID Number yet. Prior to application this must be complete.

Be prepared with:

  • Business Entity Name and Employer Identification Number/Tax ID Number
  • Business Plan with Projections- If you are in your first two years of business, several financial institutions will want to see a well thought out, organized Business Plan with Revenue Projections. Your SCORE business Advisor will be a significant asset in helping you to organize this process.
  • 3 years of personal tax returns
  • 3 years of business tax returns: If Applicable for the time you have been in business
  • 3 years of previous business owners, business returns. If you are purchasing a new business any prior financials will be helpful if you are able to obtain them. This will give lenders a view into the feasibility of the business as it stands.
  • Personal Financial statement- your lender will provide this for you to fill out. Knowing your assets and liabilities will be helpful to complete this.
  • If you are currently in business, a Year-To-Date Profit and Loss statement - what is the breakdown for the current time period of your business income vs expenses?
  • Each lender has a set of required documents in order to apply for a loan. These are a base that will provide you the first preparation of requirements for a majority of institutions. This does not mean this is all that is required. Please speak with your banker to know what your institution will require.

Understand Your Loan Purpose and What Types of Lending Options You Have

First, identify the purpose of your loan. Are you purchasing a truck or piece of equipment? Are you looking for short term cash for operating income such as inventories or accounts receivables gap? Have you identified a piece of real estate to house your business? Once you have the purpose, there are several different types of lending to consider. Your banker will be able to assist you but here are just a few types of loans that are offered; Real Estate Secured Term Loan, Line of Credit, Secured or Unsecured Term loan, and several SBA options. SBA Lending helps businesses obtain credit by giving the financial institution a government guaranty in case of default with the applicant. Not every situation needs an SBA backed loan, ask your lender for further details on your request.

Decide on Your Lender

Have you already established a solid relationship with your current banker? If you have one, make an appointment and ask what the requirements are for your current Financial Institution. If you don’t, start looking for a banker that you connect with, one that isn’t afraid to ask the sometimes-difficult questions. Make sure that you have someone that believes in your business and you as an owner. Find a Lender that understands your product or service and wants to work with you long term. Find someone that if they are not able to help you now, they are not able to advise you to get to a place where they can find a solution for you. You want to make sure that the financial institution and banker you are working with are able consider the request that you are looking for. Not all financial institutions will lend to all industries, or all lending types. Your banker should be your trusted financial resource looking to help you find solutions.

Calculate Your Loan Payment/Payoff Goal

It’s a good idea to know what you can afford going into the lending process, and when you expect to pay off your loan. There are several resources and calculators that can help you understand your proposed loan payment. If you need help with this, work with your banker to understand the payments that are comfortable and accurate for your business, as well as the term that you will need to pay it back within.

Understand your lenders fees and charges: When applying for a loan there are different types of fees and charges that will be associated with your request. For example; if your loan requires an appraisal, lending institutions will have to hire a third-party provider and pass on the appraisal costs to you. Commercial appraisals are significantly higher than residential appraisals. There are typically documentation and processing fees, potential other third-party fees such as recording, title fees and SBA fees. Some institutions have pre-payment penalties. Be realistic with your fee expectations and ask your lender upfront what those fees are. It is normal to have different charges depending on the loan type, so make sure you factor them in.

Next projects: Going back to our first step in the process, start thinking about your next project or need. Lending can help businesses build revenue, increase cash flow and help fill a need of expansion or general operations. It’s important to think big picture to not only prepare, but figure out feasibility, as well as how long you should take to pay off your first loan. It is important to talk to your banker about future goals so they can better understand how to help you.

As we navigate in an ever-changing environment for our businesses, our Customer Behaviors and our own personal lives, we have to remember to step back to the basics. Create Goals, Do your best to prepare, Find a Mentor and Tap into your circle of advisors. You Are an Entrepreneur for a reason, and have shown the ability to do so. Have you and your banker built a solid long-term relationship? Get to know each other, talk to them about your goals, and identify next steps and solutions. As Commercial bankers we pride ourselves in helping the communities and businesses we serve to be successful.

About the author
Cynthia Lamberson headshot
Cynthia Lamberson
Guest blogger Cynthia Lamberson is assistant vice president for business banking at Citizens National Bank of Cheboygan.
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401 E Mitchell St.
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