Expert Advice - December 2007

In Need of a Business Loan?

Improve Your Chances for Approval

by Calvin Regan

Recent turmoil in the residential mortgage and corporate finance markets combined with the slowing economy, have caused many banks to tighten their credit approval standards. If you own a business and need a loan, there are several things you can do to improve your chances of getting approval on a business loan.

First, do not wait until the last minute to go to a bank to apply for the loan. No one likes to feel like they are “under the gun” and many loan officers will be more apt to turn down a loan request if the timeframe is too short to properly analyze the loan request.   

Second, do not “shotgun” your application to several banks at the same time as all of the banks will be pulling credit reports which may lower your credit score.

Third, provide a complete package of financial information when you submit the loan application. A complete package includes:  

• Three years of business tax returns (including all schedules), a current (within 90 days) company prepared interim income statement and balance sheet with the comparable interim statement from the previous year

• Two years of personal tax returns (including all schedules)

• A current personal financial statement

If your business is less that two years old or your loan request is for a major expansion, you will also need to submit financial projections. Many businesses submit projections with cash flow that cannot support the company’s existing debt and the proposed new loan. This situation will virtually kill your loan request. As a rule of thumb, net profit after tax plus depreciation and amortization plus interest expense should be able to cover the principal and interest payments on all of your existing debt and the principal and interest payments on the new loan you are requesting by at least 1.25 times. Another mistake often made with projections is that the business does not include the underlying assumptions that were used to arrive at the projected figures. The bank needs to know what your assumptions are to properly analyze the projected income statement.

Ask your bank about a Small Business Administration (SBA) loan if: your loan request is projection based; your business is short of the 1.25 times debt service coverage ratio; or if you are looking for a higher leverage transaction.  

The SBA loan programs allow a bank to take more risk because the SBA guarantees a percentage of the loan made to the business. This limits the loss potential of the bank.

If you choose to apply for an SBA loan, make sure you apply at a bank that is a Preferred Lender (PLP lender). PLP lenders can process, approve, close and fund an SBA loan directly. There is slightly more paperwork involved in an SBA loan. However, if you apply with a PLP lender, the bank will be very experienced at making SBA loans and will handle the paperwork for you. SBA loan programs are great for new and existing businesses looking for higher leverage transactions to meet the needs of their growing business. The increased leverage of an SBA loan enables the business to save its cash for growth or for reserves if times get tight. As conventional lending standards become more rigid, an SBA loan makes great business sense.

Calvin Regan
Calvin Regan is the president of Silver State Bank.