Yesterday I looked at a loan package – the collection of all documents a bank would ask for to make a credit decision on a loan. Within a couple of minutes I knew this loan package could not be submitted to the bank as it was. There were a number of careless mistakes or errors that would have been red flags for the banker. In today’s extremely tight credit market it is especially important to completely fill out all bank loan forms accurately and honestly. Don’t leave anything out.
Here are common mistakes I see (and ones that I saw in the loan package yesterday).
- Make sure your personal financial statement (PFS) matches your tax returns. For example, if you say you are taking $190,000 a year out of the business than make sure your tax return shows that your income reported to the IRS matches that figure.
- Make sure your PFS is up to date. Most lenders will accept a PFS dated within the last year. Many will accept one that is in your own format or on another lender’s form. The critical issue is if there have been material changes on the PFS since it was originally created; fill out a new one showing the changes.
- Make sure you don’t leave any personal debts off of your PFS. A lender will see your credit report and see the additional debt. You don’t want a lender wondering whether you were deliberately trying to misrepresent the accuracy or simply sloppy.
- If your company balance sheet shows accounts receivable (A/R), make sure it really is A/R. Don’t include bids out, don’t include work in progress. Only include items on you’re A/R aging for goods or services that have been delivered.
- If your company shows bad debt write-off on your balance sheet and it is significant (>5% of total annual sales), explain the write-offs on a narrative. Don’t wait for the lender to ask you about it.
- If you have old A/R on your balance sheet set up a contra account for bad debt. You want to show your lender you understand the value of the collateral is compromised because the A/R is old.
- Make sure all the titles of your officers match from document to document. If “Fred” is shown as the President on one document, call him that on all documents. Don’t refer to him as the CEO on one and President on another.
These may seem like trivial issues, but when a lender is reviewing your loan package they are looking for attention to detail as well as accuracy.
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