One never goes for a business loan
without some apprehension, but
there’s no reason to fret about approaching a bank to borrow money.
That’s why the bank is in business.
Smart Business spoke with Jim
Schroeck, vice president of business banking at Fifth Third Bank, about the lending
process.
How should a business prepare when going
for a loan?
The first thing a new business should do
in preparation for a business loan is develop a written business plan that clearly
demonstrates that the owner understands
the products the company is offering along
with the markets it plans to serve. Included
in the business plan should be a description of what the business intends to do,
forecasts for revenue and expenses for the
first three years, a market analysis that
demonstrates that the market will support
its product, and a brief bio of the owners
showing that they have experience in their
particular fields.
Businesses established for more than
two years should be prepared to provide
the bank with accountant-prepared financial statements or tax returns for the past
two years, along with all the owners’ personal tax returns. In addition, you should
have a clear idea of how the funds will be
used, with supporting documentation,
such as purchase invoices or purchase
contracts, when acquiring equipment or
real estate.
Do I start with my accountant or my bank?
Along with your attorney and banker, an
accountant is a vital partner for any successful business. For a new business, your
accountant will provide assistance with
forecasts and valuable feedback of the viability of your business plan. These forecasts should be included in your business
plan. For established businesses, the
banker will want to review financial statements or tax returns prepared by an
accountant, so it’s important to establish a
relationship with an accountant who can
provide guidance throughout the process.
Whom should I approach at the bank?
It is always best to start with a local lending officer who will likely have a good
understanding of the market you’re doing
business in and will be accessible throughout the process. A local lender can be a
valuable resource throughout the loan
process by having knowledge of the current trends in your market, along with key
business contacts that can be useful to the
future success of your company.
Is a written business plan required?
For businesses less than two years old, a
written business plan is preferred to
demonstrate that the prospective borrower
has an understanding of his or her industry
and the markets he or she is serving. For
businesses more than two years old, a business plan is generally not required; however, you will want to provide a detailed plan
for the use of the loan proceeds and
demonstrate the ability to repay the loan
based on the results of the past two years.
What other factors will the bank consider?
In addition to the company’s ability to
repay the loan under the terms of the note,
the bank will look at the personal credit of the owners, which provides a good barometer in determining how the business will
repay its debt. Those business owners who
have below-average personal credit scores
are considered to be higher-risk business
borrowers to the bank. Also, the bank will
want to know what collateral you can provide to support the loan. Any assets, like
equipment, property or anything with tangible value, can secure a loan since they
can be sold to generate funds for repayment in the event of default.
Who sets the interest rates and terms on
loans?
Things like interest rates and terms are
set by the loan officer and are negotiable
for most commercial loans. Interest rates
are set based on a number of factors,
including credit strength of the applicant,
type of collateral offered, cash flow of the
business and the overall relationship you
maintain with the bank. The stronger each
of these factors is, the lower the rate may
be relative to other applicants.
Terms are set based on the purpose of the
loan proceeds. Generally, lines of credit
used for working capital are set for a year
at a time and reviewed annually, while
loans to finance equipment are set for five
to seven years. Loans to acquire real estate
are normally set for five to seven years,
with a longer amortization of 15 to 20 years
to match the useful life of the asset being
acquired.
How long should I expect to wait to hear back
with a decision?
Depending on the complexity of the loan
request, you should expect to hear back
from your loan officer within 48 hours of
submitting a complete loan application.
Decisions on loan requests less than
$50,000 are generally made within 48
hours, while larger requests may take up to
10 business days for a formal decision.
JIM SCHROECK is vice president of business banking at Fifth
Third Bank. Reach him at [email protected].
