Continual turmoil in the credit markets combined with the slowing economy has 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 “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. Also, don’t submit a loan application to bank X on bank Y’s application form. This makes it look like bank Y declined your loan request and you were too lazy to fill out Bank X’s loan application.
Second, provide a complete package of financial information when you submit the loan application. A complete package includes:
• A current personal financial statement.
• 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).
Third, 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.
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. 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 plus the principal and interest payments on the new loan you are requesting by at least 1.25 times.
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, ask your bank about a Small Business Administration (SBA) loan.
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.
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.