JW: If you already have a business, there isn’t a lot you need to do to apply for a loan. The best thing you can do is make sure you have accurate financial information on your business, both income statement and balance sheet. If you do not have an accountant, this would be a good time to find one who can review your books to make sure you are presenting an accurate picture of what your company is doing. You should also make sure that you pay all of your bills on time (both personal and business). Any recent late payments will reflect poorly when you apply for a loan. If your business is not turning a profit, you should try to do everything you can to turn that around before applying for a loan. Sometimes that isn’t possible, but banks will be much more willing to lend to a business which is profitable than one which is not. If you have a chance to project your income and expenses over the next year based on certain assumptions, it can be helpful to the bank, but not absolutely necessary. Lastly, understand your personal financial situation and, if you don’t have a high net worth (defined as your assets less your liabilities), then you might want to start talking to family and friends about their willingness to assist you as you start applying for a loan.

JW: Part of this will depend on the bank. Some banks may not even consider a loan if the business has not existed for at least three years. Typically, however, the application process is very similar, regardless of the age of the business. Just because a business has been around for 20 years doesn’t necessarily mean it is a good candidate for a loan today. As anyone in business knows, things change—competition, technology advances, and changing social or demographic trends may all impact how a business is performing. Historical performance is important, but the banker will be more focused on what is happening now.

For the loan application, the borrower should be prepared to have:

• two to three years of business tax returns if the business has been operating that long,
• year-to-date financials printed from the business’ accounting software program, including income statements and balance sheets, and
• financial projections for the next 6 to 12 months.

Two to three years of personal tax returns and a personal financial statement listing all of an individual’s assets and liabilities is also typically required for each person who will be signing or guaranteeing the loan. This will usually give most banks a starting point, but additional information may be required as the loan process continues.

JW: Unless you are a corporation with multiple shareholders, it is likely that the bank will want you to guarantee a loan personally. From the bank’s perspective, it causes concern when someone is not willing to stand behind his or her business.

JW: This will really vary on a case-by-case basis. With one customer and no other assets in or out of the business available to secure a line, it is going to be very difficult for a bank to provide a line of credit. Usually the best option is to try to negotiate with that customer on favorable payment terms. Maybe the customer could provide a payment up front, or at least agree to provide payment within three to five days of receiving an invoice. Friends and/or family could also be used to supply additional collateral and/or cash to help support the business.

JW: Business experience is an intangible that can help if a bank is undecided on a credit decision. But, if the other pieces of the lending puzzle aren’t there (i.e., no cash flow, no collateral, and poor credit of the guarantors), then experience really isn’t going to matter.

JW: Having an existing relationship with a customer does help in the credit process. A person or company that maintains account balances (i.e., no overdrafts), pays loans on time, and has a history of being responsible will be viewed more favorably than someone who might have the same factors, but who has not been a customer of that bank. On the other hand, an existing customer who has not maintained their accounts or loans will be viewed less favorably. On the whole, any time the bank has experience with someone, the more likely they will try to make a loan for that person.