In Part 1 of this series I discussed in general what lenders want to see in terms of business documentation in order to consider making loans to your business. In Part 2, I discussed in detail about half of the items. This post is Part 3 and will provide additional detail about what lenders look for when making business loans.
Today I will discuss the importance of:
Owner’s personal financial statement
Owner’s personal tax returns for last 2-3 years.
Source and use of funds schedule.
Business Plan: Lenders want to see that you have thought out how you anticipate to use loan proceeds and what kind of revenues you project you will generate because of the loan. Many loans for working capital are intended to allow the business to grow in revenues. A lender wants to see that his proceeds are going to help the business grow. The business plan doesn’t have to be lengthy, but it does have to state the source and use of cash, explain management credentials, and source of the domain expertise necessary to operate the business. A cash flow forecast is generally desired for the first 12 months and Forecasted revenues/profits for the length of the loan or five years, whichever is less. The business must be able to show in the business plan that it can service its debt. If the loan is for construction, plans should be submitted with a schedule of how the building will be utilized. The information that will be critical includes whether the building is a single owner occupied building or investment property. If it is investment property, be prepared to show market need and anticipated revenues per square foot for the space. If you have any tenant letters of intent, include them with the plans.
Owner’s Personal Financial Statement: Many borrowers don’t understand why a lender wants to see their personal financial statement. Very simply put, on most loans, all 20% or greater owners will be required to personally guarantee the loan. If the business defaults on its loan, the lender will seek repayment from you. The personal financial statement will help them determine that you have the assets and personal cash flow to be able to service loan debt should that occur. My company’s website has a good example of a personal financial statement you can use.
Owner’s Personal Tax Returns: Just as a lender wants to compare the business tax returns and financial statements, so does the lender want to see both the borrower’s personal financial statement and tax returns. Remember to copy the entire tax return, not just the first two pages. Lenders will generally ask for the last 2-3 years of returns.
Source and Use of Funds Schedule: If you have not included a business plan or didn’t put this schedule into the plan, you will need to provide this as a separate item. Sources of funds include the loan you are requesting, down payment money you may be injecting from the business, or money you are personally providing to make up the portion of the project or purchase financing that won’t be coming from the loan. The uses portion of this schedule should be sufficiently detailed so the lender will know what kind of collateral will be purchased with the loan proceeds. Many lenders consider it good business practice to include a contingency line item in the source and use schedule. Depending on the size and complexity of the project, I have seen from 10-20% of the total project financing set aside for unforeseen events.
Inventory Listing. Depending on the type of loan requested, this document can either be detailed or a summary report. If your business is inventory intensive such as a distribution business, this will be more critical than say a construction company. If the lender will be financing a significant amount of inventory, they will want more detail including the location of the inventory and value at cost. The will also want to insure that the inventory is such that it can be liquidated if necessary due to default.
My next post will be the last in this series and will discuss corporate documents you should provide a lender when submitting a loan request.
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EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his Ask the Expert podcast show.