This section will give you an overview of the loan application process.
Each lender has a slightly different process in each type of loan has processes unique to that type.
When you apply for a loan your banker will explain the specifics for your loan and their organization.
In addition I'll show you how to decide if your lender is the right fit for you.
Knowing the basics in this section allows you to be better prepared for the application process.
This will reduce your stress and decrease the application process time.
It also allows you to start gathering or creating key documents now before you formally apply for the
loan.
Being ready also shows your lender that you are a competent professional and easy to work with the lender
will do all sorts of financial analysis.
On the other hand we're all human and everything you do in the application process communicates your
credibility to your lender before we dive into the specific documents and analysis of the application
process.
I wanted to give you the high level questions your lender is trying to answer in the application process
they first want to understand why you want this loan.
Another way of asking this question is What will you use the loan proceeds for one common reason for
a loan is to make an investment that will provide a stream of future cash flow.
A great quote by Norman Ralph Augustine is it's easy to get a loan unless you need it.
Like all great jokes it has a kernel of truth.
You obviously need cash you don't have if you're applying for a loan the bank wants to know how the
loan will improve your financial situation so you can pay the loan back.
Some businesses have a very low chance of success.
Lenders won't make the loan if they see it as only delaying the inevitable failure of a business.
The question of how you will use the loan is closely linked to the question of how you will pay back
the loan.
Lenders are very conservative investors unlike owners.
Their reward is capped the interest and fees they charge their investment quickly becomes unprofitable.
If there is even a small chance that you won't be able to pay back the loan.
Larger loans will be reviewed by multiple people at the lender.
On top of that regulators review business loan files to confirm that the loan was made in a safe and
sound manner to the bank because loan officers must be so cautious they will identify at least two sources
of repayment for business loans.
The primary source of repayment is usually the cash flow of the business.
Other sources of repayment are cash from the personal guarantees of owners or liquidation of the collateral
pledged for the loan.
I'll explain pledging collateral and personal guarantees later in this course proving the strength of
your projected cash flow is crucial to whether your loan is approved and what interest rate you will
pay.
Once again the primary source of repayment of the loan is usually the cash flow of your business.
Cash flow is keen to you as the owner and it's King to your lender.
I approved loan pricing at one financial institution for all loans over one million dollars whose rate
was fixed for more than five years.
The strength of the borrower's cash flow determined whether the borrower was offered a low interest
rate more than any other factor except maybe character which I'll discuss in the next section of this
course
yes collateral matters but not as much as you may think.
I'll show expectations for a collateral value in the next section.
Remember though that the collateral only matters if something has gone wrong with the borrower's cashflow.
It's like insurance you don't buy insurance hoping to collect on it because of some tragedy.
Some borrowers will point out how good their collateral is.
Lenders do not want to foreclose on real estate or other company assets you pledge as collateral for
the loan.
The lenders profit margin on a loan is so low that they usually lose money on the loan if they have
to repossess collateral.
It's a massive time suck and stress for everyone involved just like the bank deciding if your loan is
a good investment for the bank.
You can decide if the bank or lending institution is right for you.
For example if you're a small business owner that likes personal interaction and guidance during the
loan process.
Working with a community bank may be better for you than the more automated processes used by some other
lenders.
Some lenders have industry specializations.
I worked at one bank that specialized in agricultural lending to family farms.
I worked for another bank that had top tier private banking wealth management and trust services.
Also look at the bank from the perspective of your full banking relationship.
Is this bank convenient or responsive for all your other banking needs like deposit products personal
banking for the owner or merchant services for your debit and credit card processing.
I've done a lot of customer profitability analysis over the past 20 years.
The profitability from deposits is more than the profitability of loans for most business customers.
There's a reason the titles of business bankers has shifted from loan officer to relationship officer
over the past few decades.
There's a reason your banker also ask you to move your deposits to their bank if you borrow from them.
Many borrowers will shop around their commercial real estate loans to multiple banks or use a loan broker
to do this to get the lowest rate banks price.
These loans as loss leaders or low profit leaders at least to get their business.
However many banks have moved or are moving to customer profitability modeling in these models.
The profit from deposits and other services allows the banker to offer low loan rates.
You may have underestimated how valuable your deposits are to a bank and what that can lead to and good
loan pricing for accountants watching this course learn who the leading business bankers are for different
industries or types of businesses.
It's easy to refer everyone to one or two bankers but they may not be the right fit for your client
in the beginning of your business.
You may be thankful that any bank would make a loan to you as your business becomes more successful
and grows.
You'll want to know if your bank can meet your needs as you grow that community bank with personal service
may lack the branch network or breadth of products to serve your needs down the road.
Banks are limited on how big of a loan they can make based on the size of their capital.
If you borrow large amounts of money from a smaller bank they may sell portions of your loan to other
banks.
This is called participating out your loan.
That can slow down the approval process and make future loan modifications much more challenging like
I mentioned earlier.
Banks have migrated to calling the business bankers by the title of relationship officers find out which
of these officers you can really form an advisory relationship with and which officers treat loans just
like transactions when you are under a tight deadline on a loan.
You want someone who is responsive.
Bankers work with many borrowers and some have formed industry specializations.
They learn a lot about you during the application process.
They can be a wealth of knowledge to you about how to improve your business.
Don't confuse them for consultants but they can provide many tips.
There are also great referral sources when you need other services like accountants and attorneys for
accountants watching this course consider how you can network with business bankers bankers accounts
and attorneys working together for the client enhance client satisfaction and build networks where everyone
wins the loan application process can be broken down into four main steps.
The first step is completing the loan application and giving the lender a pile of documents.
I'll list out and explain many of these documents later in the section of the course.
Next the lender will analyze those documents and decide whether to offer a loan to you.
That process is called loan underwriting and I have a whole section on it later in this course.
Third the lender will notify you of their approval pricing and critical requirements for the loan.
Some of you will just be praying to get approved and will immediately take the loan if it's given you
other of you have more financial strength and can negotiate for prime rates either when you make your
application or once you have approvals from one or more lenders.
The final step is the actual loan closing.
This is when you sign a set of loan documents to receive your money.
I have a whole section later in this course on the key documents you will sign get a copy of the loan
documents before you sign them and read them.
If you don't want to read them or don't think you'll understand them have an attorney or account.
Read them and offer their insights.
I was the CFO of a bank and we hired an attorney to review a branch lease we were entering into.
We all need the services of an expert for significant contracts.
Make sure you are confident you can meet all the requirements the loan documents understand your rights
and responsibilities.
It's now time to explain some of the major forms you'll fill out or documents you'll need to gather.
When you apply for a loan some of these take time to prepare so start preparing them as soon as you
think you'll be applying for a loan the application is the form from the lender where you enter the
basics about you what type of loan you want how much you want and why you want the loan.
Each lender has a different form a business plan is the story of your business.
It may be as hokey as a made for TV holiday movie or as compelling as a Hollywood blockbuster hit.
I'll get into more details in the underwriting section but you want your story to show the lender how
you have the cash flow strength to pay back the loan even if things don't go according to plan.
Your plan is critical to the credibility of your business.
The lender will request the resumes of major owners and managers.
They want to confirm the competence of the business team your financial health and how you've used loans
in the past are powerful indications of how likely you are to pay back this loan.
Leases are a form of debt that you didn't have to put on your balance sheet in the past.
This is all changing right now due to changes in the accounting rules for leases in the past.
Many leases were considered operating leases.
The future payments on those leases didn't need to be included in the debt section of your balance sheet.
A new accounting rule says those payments do need to be included in the debt section of your balance
sheet.
You'll also book a new asset for the right to use the least assets in a rough one two punch your return
on assets goes down and your debt ratios go up appraisals are required for large real estate loans.
The lender will want a solid valuation or appraisal of any asset that's pledged on the loan as collateral
or as critical to the value of your business.
Your accounts receivable agent report acts both as evaluation of your accounts receivable asset and
as an indicator of your future cash flows the accounts receivable report breaks the cash owed from your
customers into buckets based on how many days past do they are common.
Buckets are current or not past due 30 days past due or less 31 to 60 days past due.
60 to 90 days past due and over 90 days past due.
Large amounts of past due receivables usually indicates poor cash flow and future uncollected Bill amounts.
Your receivables may be part of the way the lender determines how much you can borrow on your line of
credit.
The better your accounts receivable the more you'll be able to borrow against it your business cash
flows may be dependent on a few large contracts your lender will want to verify the amount of those
contracts and the likelihood they will stay with you in the future.
We're talking about banking seeing new cold hard income numbers would be required at some point.
The two main sources for this are your tax returns and your financial statements.
You'll probably be asked to provide the tax returns for the past two years.
Credit analysts at the lender will spread your statements or spread your returns.
This just means that they will do financial analysis and trend analysis on them to assess your financial
health.
Lenders look at your cash flow more closely than other investors.
You can't pay your loan with profits.
You can only pay cash.
The balance sheet and income statement give them indications of your current and past financial performance.
But the cash flow statement will show how that translated into actual cash the cash flow projection
and your business plan shows your estimate of your future ability to pay back the loan aggressive tax
strategies can cause you heartache when you apply for a loan.
Many owners and their accountants do all they can to show low earnings on the tax return.
They then submit those returns to a lender who wants to see good earnings and cash flow aggressively
reducing your income on your tax return means you have more work to do to show the lender how you'll
pay back the loan for the accountants taking this course.
You may be better able to explain this to the lender than the owner.
If the bank asks about it also for the accounts watching this you know that your clients request tax
returns and financial statements if they're applying for a loan you may have also collected critical
financial documents that you can easily provide to your client to help them gather info for the application.
You may have these documents in a digital format needed by the lender and to be honest your records
may be more organized than your clients.
Yes I've seen clients arrive with literal shoeboxes of receipts documents like your articles of incorporation
organization documents partnership agreements and business licenses serve multiple functions.
The first purpose is to reduce crime and fight terrorism.
Ever since 9/11 regulators have been greatly increasing the requirements of financial companies to know
the identity of businesses and business owners.
This is required by the Bank Secrecy Act or BSA and it's a really big deal to regulators.
The requirements for identifying business owners increased a few years ago.
Please understand this when your lender asks for these documents.
As the saying goes In God We Trust everyone else must provide data not having some of these documents
or having really poor ones may indicate to the lender that you haven't complied with requirements.
This could lead to fines or penalties that could hurt your future cash flows not complying with government
regulations doesn't bode well for your ability to follow the loan agreements and its requirements.
The documents on this slide identify the owners who may be asked to provide personal guarantees for
the loan.
Lenders may need those owners personal tax returns financial statements or credit scores.