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What should I do before applying for a loan?

When seeking financing, middle-market companies would be wise to follow the Boy Scout motto and Be Prepared®. Lenders tend to favor businesses that do their homework. Not only does it make the loan process go more smoothly, it helps get your business leadership team all on the same page.

Before applying, take these steps.

Step one: Update your business plan.
A well-written business plan can be critical to building lender support for a loan application. Your plan should include information that will help your bank make a funding decision. That includes facts about your products and services, corporate objectives, business model, competition, marketing strategies, management team and financial projections. If you are seeking the loan to fund a new initiative, you might also include a feasibility study that provides a third-party assessment of the project’s technical, legal and financial viability.

The contents of your plan and any related studies should be up-to-date, easy-to-read and, above all, realistic. Every business faces competitive challenges, product changes, personnel issues and other potential pitfalls. It’s important to identify the opportunities and the risks you face, as well as your plans for addressing them.

Step two: Assemble financial statements and other supporting documents
Lenders are likely to require profit and loss (P&L) statements summarizing your business revenues, expenses, cash flow and a balance sheet for the most recent three years. These can be compilations, reviewed statements or audited statements prepared by your CPA. Also be ready to provide your business’ tax returns for the past three years, which banks use to confirm CPA-prepared statements.

If you don’t have a current relationship with a lender, you may be asked for bank statements, accounts receivable details, third-party contracts and other business documents that provide evidence of a solid financial record and strong assets. Expect lenders to check your business credit profile using Dunn & Bradstreet or vendor reports, as well as to review the majority owner’s personal credit report.

Step three: Meet with your accountant.
Lenders ask to see financial statements and income tax returns because they want to understand the details of your fiscal operations and assess your business’ cash flow. From a lender’s perspective, financial statements are the official last word on income. If they show your business has no earnings, your business has no earnings. And a business that has no earnings will likely find its loan application denied.

Accounting strategies that are great for lowering taxes, in other words, can undermine your ability to obtain a loan. With proper planning, however, you can get some deductions and obtain your loan, too. A skilled accounting firm can devise a strategy that enables you to limit your taxes while still positioning your business to finance new purchases, expand your operations or manage fluctuating cash flow.

Step four: Prepare to defend your plans.
The ideas and data in your business plan aren’t just assembled for potential lenders’ consideration. They should be reflected in your leadership team’s decision-making as well.

CFOs, in particular, should know the details of their financial forecasts and strategic plans inside and out, and be prepared to defend them to prospective lenders. Anticipate and prepare for questions you may be asked about other debt and creditor your business may have. As the senior liaison between a business and its bank, a CFO should also be prepared to explain the lender’s mindset and positions to the CEO and board of directors.

Step five: Build and/or strengthen your relationship with your banker.
Lending decisions are based on a combination of objective and subjective criteria. The more a banker knows about your company’s history and management team, the better they are able to assess the more subjective elements of the decision-making process.

So don’t wait until you’re ready to submit a loan application to call your bank. While these other activities are ongoing, invite your lender to meet with your business’ key leaders. While you educate your banker about your business and its management, also take time to learn more about your bank. Does your lender understand your industry and have a history of financing businesses like yours? Does it have a track record of making loans about the size of the one you are seeking? After reviewing your circumstance, can it provide any tips that will strengthen your chances of success?

Thorough preparation, in short, is no guarantee that you will get the loan you seek. But the process may open your eyes to new insights, while also putting you in the strongest position possible for obtaining the fund you seek.

Also see:

Evaluating the feasibility of your new idea

Five things to consider when evaluating a bank