Chris Martin

Friday, 25 February 2005 08:50

Applying for a business loan?

When applying for a business loan, most borrowers have to psych themselves up for an epic battle against the banks and their lenders.

Winning the battle means getting the right loan from the right bank. It means having a lender who understands your business and what it's going to take to get you started and keep you going. It means having a bank and relationship officer who sees his or her role in your business as a partnership.

Winning the battle means understanding how to apply for a small business loan.

When you apply for a small business loan, you need to be prepared to discuss the four P's.

* Purpose

* Payment

* Protection

* People

When you identify your purpose, it's important to identify your project and project costs. Explain your niche and the value you provide and how you differentiate from the competition.

Also be ready to explain exactly how you will use the funds and what they will do for your business. Will this loan help you get in business, stay in business or expand the business? A financial history can be beneficial here.

Next, consider how you will make the payment. Where is the money coming from? Is this an adequate source? Explain the reliability of your payment source. Be prepared to present business income tax returns and financial statements (if applicable) from the previous two to three years. Also have interim financial statements, including a balance sheet and profit and loss statement, that aren't more than 90 days old.

Protection and people are the last P's to consider. Does your collateral have sufficient value to cover the loan? Does the bank have control over the collateral? If the business fails, are you personally willing, and personally able, to repay the loan?

If you can answer these questions during the initial conversation with the bank, you are on your way to getting a fast and well-informed decision.

The next thing is the approval process, affectionately known to credit underwriters as the "C's" of credit. Some lenders only rely on three or four, but you should be aware of six.

* Character

* Capacity to repay

* Capital

* Collateral

* Conditions

* Confidence

Character, in this sense, refers to the degree to which you feel obligated to repay the loan. Prepare yourself with a resume on all owners, principals and officers; and present the previous two to three years' personal income tax returns and personal financial statements.

When evaluating your capacity to repay, the lender will analyze cash flow and decide whether there is room for loan payment. Present a projected financial picture, including the first year (presented month-to-month) and the subsequent two years (presented annually). Support your projections with a list of assumptions.

Capital is concerned with a borrower's financial stability. This can prove to the lender your ability to repay the loan if the business cannot. Collateral relates to how the loan will be secured. Conditions are another major point -- what are the general economic, geographic and industry trends that could have an impact on your ability to perform?

Confidence is the final point. If you address the first five "C's," the lender will feel confident about you and your business.

While it may seem like a hassle to gather and present all of this information to your lender, remember that your bank is your partner throughout the loan process. It needs this information to help understand you and your business.

Good banks will use this information to make recommendations on how to structure the loan or how to effectively set up your business. The value of providing the information outweighs the expense of gathering it.

This guide can help expedite the loan application process and hopefully get you the credit that matches your specific needs, giving you the resources to successfully start or grow your business. And you can accomplish all of this on your terms, if you mind your "P's" and "C's."

Chris Martin is senior vice president of Sales and Customer Service for Citizens National Bank. Reach him at (724) 538-2200 or