Applying for a business loan is a significant undertaking, and it’s a good idea to get your business operating as efficiently as possible before asking for a loan. The amount of preparation you’ll have to do really depends on whether you borrow from a bank or a commercial lender. A bank is going to grill you and demand a lot of information that a commercial lender will not need. Here are three things you need to get know when you apply for a bank loan, and how each one differs if you choose a commercial lender:
1. Know why you want the loan:
For some reason, banks feel the need to know exactly how you plan to spend every dime of your loan proceeds. We are not quite sure why this is so crucial for the bank to know, but the usual reasons include expansion opportunities, smoothing out working capital, investing in inventory or capital goods, and acquiring another company. Be prepared to show the banks how you will turn the loan money into profits (or how it will cut losses). On the other hand, a commercial lender like IOU Financial doesn’t really care how you plan to spend the loan proceeds. We assume that you know your business best, and we don’t like substituting our judgement for yours.
2. Know your books:
A bank is going to review all your books and records before approving a business loan. This includes all your past income statements, balance sheets, tax filings and all other public information. Be prepared for questions on why certain expenditures were made or why a particular strategy was worth the investment. You really don’t know what the bank loan officer or underwriting committee is going to ask. Sometimes, a line of questioning can lead to new questions in different areas, a process that can drag out for weeks or months. You can be sure the bank will calculate all your financial ratios, and will interrogate you on any that are below industry averages. We are really only looking for two things:
a. Does your business generate at least $100,000 a year in revenue?
b. Have you been in operation for at least one year?
If both are true, you are well on your way to obtaining a loan from us.
3. Know whether your cash flow allows you to repay the loan:
This is a very important question that every lender, including us, is going to ask. Now, a bank is going to want to analyze your sources and uses of funds, your cash management policies, and your projected and actual budgets. The bank may want to know about your collection policies and examine your bank statements. If it sounds like an extensive process, well, it is. We have a different view – we only ask two questions regarding cash flow:
a. Do you generate 10 or more deposits each month into your business bank account?
b. Do you maintain an average daily balance in your business bank account of at least $3,000?
Assuming you own at least 80 percent of your business (or 50 percent if owned with a spouse), you can qualify for a commercial loan from IOU Financial with just a few facts. With a bank, you are more likely to feel like a trial defendant under cross examination. Perhaps that’s why it takes days or months to get a bank loan, while we can lend you up to $150,000 in as little as one day.
Contact IOU Financial today for a free consultation about your small business’ loan needs.