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Borrowing for an Established Business


Step 1: talk to your current banker
Do not wait until you have an immediate need – this reflects negatively on your management skills
Also, the approval and funding process can take longer than anticipated
Lenders/Banks may have limits for lending to your industry based on prior experience or
regulatory restrictions
Keep in mind that there are 2 types of lenders – cash flow or collateral

Step 2: provide lender with historical financial reports
Typically lenders want to see 2-3 years of tax returns as well as current year results
Provide a current personal financial statement – you will probably be required to guarantee the loan
Some lenders will want to see personal tax returns as well
Business and personal credit reports will be checked, so know in advance what is contained in them

Step 3: be prepared to explain the amount requested as well as the use of proceeds
Be sure your use of proceeds coincides with the structure of the loan
This means that lines of credit should not be used to buy fixed assets

Step 4: be prepared to explain your historical financial results
Lenders look for sales/revenue trends, profit margin changes, net income, and cash flow
Lenders also look at the balance sheet to look at working capital levels, leverage, and other trends
Lenders compare your historical financial results to other similar firms in your industry via the use of RMA statement studies and other sources
Some lenders rely on credit scoring models to assess in full or in part whether loan is approved

Step 5: Lender assessment tools
Primary repayment source is the historical cash flow of the business
Secondary repayment source is the presence of self-evident collateral and/or the overall financial strength of the business and guarantors

Step 6: If your request is declined
If your lender indicates that your request “almost” fits their approval requirements but there are some issues that preclude approval ask if they participate in any/all of the SBA loan programs

Step 7: role of the SBA
SBA provides loan guarantees to lenders to enable them to approve loans that could otherwise not be funded, including:
Loans based on future cash flow
High risk industries
Insufficient clearly-defined secondary repayment sources
Loans that require a longer repayment term than the lender would typically provide
Borrowers with limited personal resources
Loans to purchase existing businesses
Loans with reduced/limited equity

hampton roads chamber of commerce thomas nelson community college small business association george mason university