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 Jim.Schroeck@53.com.