When applying for a loan, the numbers on the page are highly important. They show whether an applicant has the cash flow to repay. An experienced lender, however, can look beyond the numbers.
“Many elements are at play when applying for a loan,” says William Flinta, Vice President at Westfield Bank. “If there’s poor credit, a banker needs to know why in order to determine whether the bank can find a way to get comfortable with that client.”
That’s why having everything necessary to apply for a loan is so important to the process. It allows a banker to quickly learn an applicant’s story and help find the best solution for the situation.
Smart Business spoke with Flinta about what’s contained in a complete loan application package and how banks decide who qualifies for a loan and who doesn’t.
What do you find many business loan applicants miss when they apply?
The application aspects can be different depending on the type of loan. Regardless of loan type, applicants commonly fail to provide their complete tax return. They provide the pages they think are relevant, but not all the schedules or exhibits needed.
Also frequently missing is an understanding of what serves as collateral for the loan and who must back the loan.
What happens if something is missing?
Not having everything a bank requests increases the approval time frame because it leads to more questions, which take time to answer. There’s also the chance that working from insufficient information at the outset could lead to a premature denial if an underwriter makes an incorrect assumption instead of digging deeper.
What’s in a complete application package?
Applicants generally need to supply the past three years of complete business and personal tax returns, and if available, accountant-prepared financial statements for those same periods. It’s also good to have the current personal financial statements of all the owners of the company.
Be prepared to give a detailed explanation of the credit request that answers why the money is being sought and an explanation of the proposed collateral for the loan.
Applicants should also offer a summary of all their debts, both business and personal.
Younger businesses may also be asked to provide their banker with a business plan, which will address some of these questions.
What do banks need to know?
Bankers want to understand what’s going on with a business so they can recommend the products that are appropriately structured for its needs.
Central to a good banking relationship are comfort and rapport. Regular, open and honest conversations help keep bankers up to date, which can lead to shorter turnaround times when applying for loans and other financial products.
What is the timeline for approval?
The time between the initial application and approval depends on the loan purpose and funding request. It’s all over the board, ranging from a day for an auto loan to eight weeks on a complicated real estate transaction.
Generally, applicants can expect it to take several weeks for approval and then, depending on the loan purpose, there may be other due diligence that needs to be addressed after approval.
What advice might help anxious applicants?
Applying for any loan is a stressful time for many people because there’s an element of uncertainty and it always seems to take longer than anticipated.
It may help to know that banks are looking to better understand four things about the applicant:
- Cash flow — Does the applicant have sufficient income to repay his or her current debt plus the proposed loan?
- Collateral position — If the ability to repay is questionable, is there collateral to help cover the debt?
- Character of the business and its management — Is ownership of good character and reputation?
- Credit history — Does ownership or the principal have good credit history?
A bank is trying to get comfortable with an applicant through the answers to these questions. The more information provided upfront, the smoother the process.
Insights Banking & Finance is brought to you by Westfield Bank
