So, your business is up and running smoothly. You’ve built up some client relationships, and you have orders out the door in the six figures – maybe even seven – but a lot of them are on 30- to 60-day terms, so you’ve spent the money to produce the orders, but you don’t have the cash yet.
You figure that these receivables will be fine as far as collateral goes, so off you go to the bank, and you ask for a loan to help fund expansion while you’re waiting for the invoices to go in. However, the bank will want collateral in terms of real assets – not receivables. They’ll also want personal guarantees even if your business is a corporation. So before you walk into a bank to ask for a loan, be ready with these items that the loan officer is almost certain to request.
You can take out a loan if you’re running a startup. But you have to have some hard assets that you can pledge to mitigate the risk to the bank. Receivables can make up some of the collateral, but the bank will check each account to make sure that they are creditworthy. If you put up inventory as collateral, the bank will often take a percentage of it, but they’ll run due diligence on it. As the business owner, you may also have to put up equity in your home to get the funding.
No, the bank isn’t funding your business plan. But they want to see where you’re headed, and who is leading the way. They also want to see your most recent financials.
About those financials…
Be prepared to provide the bank with information about any and all debts and loans, both current and past, as well as any bank accounts, credit cards, investment accounts, along with all of the supporting details (tax ID numbers and complete contact information).
Full information about accounts receivable…
This means that you have to include aging information by account (so that the bank can check their credit). You also need to include payment and sales history.
…and accounts payable
This is basically the same information as you provided for your receivables. Also provide credit references, which would be companies who are willing to sell to you on account and can show the bank that you have solid payment behavior.
Thorough financial statements
On the balance sheet, you need your business assets and liabilities as well as your capital, and make sure you provide the most recent version. Profit & Loss statements should date back at least three years, if you’ve been open that long. Your statements should be audited, which means that a CPA has come in from outside your company and checked them for accuracy. If you don’t want to pay for an audit, you can usually get away with reviewed statements, which still involves a CPA but costs less, because the process is slightly less thorough and involves less risk for the CPA.
If your business depends on the founders to stay open, you may have to take out life insurance for the key person(s). The beneficiary for that insurance should be the bank, to satisfy the loan.
Personal financial information
That includes your net worth as well as information about your vehicles, real estate, investment accounts, auto loans, credit cards, mortgages, and everything else. If the business is a partnership or has multiple owners, expect to provide that for all of the owners with significant stakes in the company. And yes, that personal guarantee will be required too.
Tax returns from prior years
Start with at least the last three years of the company’s tax returns, but don’t be surprised if the bank asks for a few more years’ worth, if you’ve been open that long.
Agreement about future ratios
The majority of commercial loans have loan covenants. These are agreements that your business will keep some ratios (usually debt to equity, current ratio and quick ratio) within a certain range. If your financials go out of that range, you have technically defaulted, even if you keep payments up – so read the fine print on this.
Your Alternative Funding Options
When working with our company to obtain business capital very little is required. For Business Loans and Merchant Cash Advances, the great thing is that no collateral is required. The key items required aside from ownership & time in business verification are 3 months business bank statements & 3 month merchant statements to confirm the business cash flow and number average number of deposit. If the business is seasonal, then a 12 month history is required. This assumes the request does not exceed $100K – $250K (depending on the industry). When larger amounts are requested, financial statements and profit loss statements are needed. With respect to invoice or accounts receivable funding requests; verification of pledged accounts invoices are required and also the review of the companies that have outstanding unpaid invoices to your company for finished work. For more information, contact us today or complete the no-credit check short application for a no-obligation free quote.