There is No Free Lunch, but There Is a Strategy to Funding

You’ve worked hard and your business is buzzing.  Now you need capital to take it to the next level.

  Editor’s note: This is part one of a two part article. Your current banker is the best one to approach with a request for funds. He (no she) knows more about you than you realize. She knows you run a business that makes periodic deposits.  You may have a merchant account that assists you with payments.  She knows how much money runs through your accounts. However, that is not enough to get the funds you need. Every banker will require  documentation: perhaps each banker has a slightly different format, but all bankers require specific information that you must provide to get the loan. It is not as bad as it may seem.  Most of the information is in your files.  There are only a few documents that you must prepare. The rest you just have to provide. The following information will assist you in the process of accessing institutional capital. Checklist of Documents for a Loan Application Package to a Bank for an Existing Business and Tips on How to Put the Package Together Documents You Must Produce 1.  A Personal Financial Statement (PFS) 2..  Professional Resumes (CVs) for the Operating Team 3.  Source and Use of Loan Funds Schedule – Funding Request 4. Executive Summary (A Concise Business Plan) 5.  Monthly Cash Flow Projections for Two Years Supporting Documents You Must Provide

1. Two(or three) Years of Tax Returns (Personal and all Business Entities)
2. Interim Financials for Current Year for the Business
3. Schedule of Accounts Receivable- with Aging
4. Schedule of All Business Debt – Including Payments Due and Loan Status
5. Copy of Existing or Proposed Leases, or Sales Contract for the Business
6. Documents to Verify Special Licensing or Zoning  Compliance
7. Franchise Agreement (if Applicable)

Do not present the package until you have all the required documents. The package must contain all the relevant documents, plus any others specifically requested by the lender. You want a commitment, or an Letter of Intent (LOI), not just an indication of interest. And, try to avoid spending time on a full presentation until the lender has indicated that they would have an interest and an appetite that matches your financing request. You many need the assistance of your accountant or a third party in order to compile the required information. If you have a relationship with a lender, discuss the loan possibilities with that person and then provide the documents noted in this memorandum in order to receive a quick response. Lenders may provide their list of required documents or their application form.  You will need to compile the materials in order to complete a bank application. Many first time commercial borrowers fault banks for not being timely in responding to a loan request. However, if you provide all the required information, you will get a quick answer. If you are rejected by that lender do not be discouraged. You now have a package ready to contact other lenders. Not all banks fund all types of businesses. Seek local advice about which banks would be most responsive to the financial needs of your business. At your initial meeting with the loan officer, inform him or her that you are prepared to move your operating accounts to the bank if the loan is approved. Documents You Must Produce A Personal Financial Statement –(PFS) Although the borrower is an LLC, an S Corp, or a partnership, a personal guarantee is required on all commercial loans. The guarantors will be all individuals who own 20% or more of a business entity.  A PFS is an integral part of every loan application.  It must be current (90 days or less), and be signed. If a husband and wife file their tax returns jointly, they may prepare one PFS. Or, if only one spouse is involved in the business, it may be possible to prepare a PFS  for that individual. The PSF would reflect partial interests in all the assets and liabilities that are included on the tax return. You can use the PFS form provided by the bank (usually it is available on line) or use a generic form provided by the SBA. Preparing an accurate PFS is the second hardest part of the loan application process, but perhaps the most important part. It is a snapshot of the personal strengths and weaknesses of the borrower. It will help the lender evaluate your global cash flow. They want to be comfortable that you are not taking on more debt than you can handle. Make certain you include any student loan debt. Your Assets -Include on the PFS all owned assets – including ownership in the subject business or any other business interest. The net worth of your business may be the net worth of your business on a current balance sheet. Your business accountant will assist you in determining the net worth of your business. This may be a problem for lenders since borrowers often  carry their contribution to the business as a loan rather than as equity. Foot notes will assist in clarifying this issue. Lenders look at financial statements and tax returns differently than the IRS. The most important thing is the profitability of the business. Include in the PFS only the percentage of the business owned by you.  Also include a schedule of any other assets that you own, including cash surrender value of a life insurance policy,  a pension fund or IRA, and real estate holdings at  market value.. Assets owned include cars, boats, art, jewelry etc. should also reflect current market  value.  The lender places little weight on these type of assets in the underwriting process, but they should be included. Also include any interest you may have in Trusts. Do not overestimate the value of your real estate holdings; even if there is no equity in the real estate, be realistic. Your Income – Include all income from all sources. This information will be verified by the lender prior to loan closing.  Commission income and other variable income, will be averaged over the past two years.  You will need to provide supporting documentation prior to loan closing. i.e. child support, accounts receivable, etc. Your Liabilities – Include a schedule of both short and long term liabilities, including credit card debt, student loans, auto loans, mortgages and any debt relating to your assets or guarantees for third party assets.  The second page of the PFS is used for this purpose. Any omissions will be disclosed when the lender pulls a credit report.  Try to be accurate and current. Do not ignore any negative history that may show up on your credit report. Address this up front to avoid surprises.  Some credit issues can be overcome on a case by case basis.. Some lenders put more emphasis on collateral . Others are concerned with cash flow and debt service coverage. Most lenders want all three: credit cash flow and collateral. Professional Resumes (Curriculum Vitae or CV) The CV’s are looked at in their entirety to assure the lender that your team is qualified to manage the business. You may include the resume of a qualified employee who has the skills to support your goals. When there is more than one applicant or guarantor, each person should prepare a CV. The CVs should be concise and relevant to the business. Revise and update an existing CV. It is helpful to have an advisory board that can be considered part of the team. This may include your attorney, your accountant, a mentor, and your investment advisor. Source and Use of Funds This schedule defines the purpose of the loan in dollars.  Provide as much line item detail as possible, from estimates and pending contracts. Prepare this schedule using two columns: one for the borrower’s equity and one for the loan. Usually the loan requires an equity contribution of not less than 20%.  The business may have already contributed that amount and this can be considered equity in place . You will be able to support this contribution of equity from your P&L. Footnotes are helpful. Lenders like to see the borrower’s equity in place before they fund specific line items. This is particularly true if the loan proceeds reflect the need for pre-opening expenses i.e. permits, or other governmental approvals.  The lender wants to avoid loan disbursements if there are conditions that may not be under their control. This may even include having a Certificate of Occupancy prior to the  funding of the loan. To Be Continued in the Next Edition —————— Related articles: Keys to Obtaining Funding Are Hard Money Loans Right For Your Small Business?