Wednesday, July 19, 2006

Preparing Your Loan Request

Your loan request should include the past financial history of both the company and the principal owners. Be prepared to answer questions about competition, and how your company will separate itself from competitors. Research the numbers, and compare them with others in the industry. If your numbers are better or worse than your competitors, be prepared to explain why.
Most bankers look for three types of projections from business owners, with each projection spanning the length of the loan and including explanations: 1) profit-and-loss projection, 2) cash-flow projections, and 3) a projected balance sheet.
Other information to accompany your loan request includes:
* Personal information on all corporate officers, directors or anyone owning 20% or more of the business. Education, work history, business and credit experience should be emphasized.
* The firm’s operations. Cover areas such as the nature of the firm’s business; experience of key employees; marketing strategies, goals and objectives; inventory and permit data; and government regulations or anticipated regulations that might impact the company.
* Financial information. The banker will want to see a current balance sheet, profit-and-loss statements, federal income tax returns for the past three to five years, lease agreements, and life and casualty insurance information.
* Repayment plan. The loan package should include a complete description of how the funds will be repaid, and alternatives for repayment if funds are not generated as expected.
In addition, determine your debt-to-net-worth ratio. This ratio expresses the relationship between capital contributed by creditors and that contributed by owners. A banker will look more favorably on your loan request if your company’s debt-to-net-worth ratio compares well with those of other firms in your industry.
To compare your debt-to-net-worth ratio, divide your projected liabilities by your tangible net worth. A high ratio reflects greater financial leverage, which means increased financial risk.

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