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Janice France-Pettit: Business loan tips

Posted: April 2, 2014 2:00 a.m.
Updated: April 2, 2014 2:00 a.m.

Union Bank recently announced the results of its annual Small Business Economic Survey, reporting that an increasing number of respondents believe the small business climate will continue to improve in the next two years.

With this optimism, most respondents said that they plan to maintain the same staffing and capital expenditures, and more business owners plan to boost capital spending. Statewide, 20 percent applied for a loan or access to credit in 2013, a three-point increase from the previous year.

“These results reflect the optimism we’ve seen among small business owners as they continue to generate new business and expand,” said Union Bank Executive Vice President Todd Hollander, head of Business Banking.

If you are a business owner planning to acquire financing to grow your business, you may consider the following tips to help you prepare to apply for a small business loan.

Research your options

There are two basic types of business loans: short-term loans, which include lines of credit, working capital loans and accounts-receivable loans; and long-term loans, which are usually used for major expenses such as real estate, construction and large equipment.

Seek a trusted lender who can help you navigate the financing options available and discuss which type of loan would best meet your needs.

Understand what lenders require

Keep in mind the “Five Cs” that lenders generally evaluate when reviewing a loan application:

•Credit – Both your business and personal credit rating can effect whether you secure a small business loan and/or the terms of the loan. Request a copy of your credit report prior to applying and address any errors. If your credit history is less than favorable, consider taking steps to improve your credit score before applying.

•Capacity – Lenders want to be confident in your ability to manage your payments, and they will evaluate your business’ cash flow and debt service. They may also review P&L statements, balance sheets, business tax returns and other documents to make this determination.

•Capital – Having cash savings, investments, and other assets helps to show that the business owner is able to repay the loan and establishes the commitment of the owner to the business. A borrower’s capital contribution generally must be one-fifth to one-third of the total project cost, so if it takes $100,000 to start your business, you will be required to inject $30,000 to $50,000 of your own capital.

•Collateral – Also referred to as the “secondary source of repayment,” collateral is a safeguard available to the lender when unforeseen problems arise and the business owner is unable to repay the debt. Lenders look for personal or business assets that have quantifiable value, such as real estate or equipment that can be liquidated to repay the loan.

•Conditions - The underwriter will review the different variables and economic conditions that might adversely affect the borrower’s ability to repay the loan.

Assemble a complete loan package

Carefully review the loan application and promptly provide accurate information and documentation requested.

Depending on the type of loan and lender, you will need to provide certain documents to substantiate your ability to repay the loan. Be prepared by gathering items such as recent financial statements, bank statements, copies of your business license(s), articles of incorporation, copies of business contracts and franchise agreements, a copy of your resume and your recent tax returns (personal and business).

Typically, you will need to provide a business plan that includes an executive summary, a business profile, and business projections.

You should also provide your resume to showcase your education, industry experience, and other relevant skills, such as a strong management track record or business finance expertise.

Explain how you will use the loan

Be prepared to illustrate how you will designate the funds you are requesting. Explain how the loan will benefit and grow your business, and how this growth will enable you to pay back the loan.

Understand the terms of the loan

Before you sign on the dotted line, make sure that you fully understand the interest rate you are being offered, the total cost of borrowing, any penalties or charges and potential changes in rates.

“Small business owners are working harder than ever, and we recognize how critical it is to support entrepreneurs and their companies as part of rebuilding this country’s economy,” Hollander said.

Co-authored by Janice France-Pettit and Pattie Ehsaei. France-Pettitis a senior vice president and regional manager for Union Bank.


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