Basics of Applying for Lines of Credit, Working Capital & Business Acquisition Loans

Trying to get a Working Capital Loan, Line of Credit of Business Acquisition Loan?

There are a lot of erroneous perceptions among business people about which facts, figures and terms are important in getting a loan and which bank to get loans from.

If you are just starting out in business, one possible benefit from banking with a smaller community bank that is that you will be a bigger fish in a smaller pond, and you will get the accompanying attention and level of service to go a long with it.  Of course, make sure that the community bank that you are considering actually offers business loans, such as Working Capital Loans, Lines of Credit and Business Acquisition loans.   If the answers are affirmative, then you need to find out which types of businesses and industries they are comfortable lending to.  Let’s say  you are in the light manufacturing space, make sure the bank has not been burned on loans to other companies in your industry.  If so, they will be gun shy.  Remember the adage, once bitten twice shy.  So check around with banks until you find a few choices that are comfortable and familiar with the industry that your business is in.

Beyond that here are some other things you need to be aware of:

Have a business balance sheet ready.

A balance sheet is a document that lists the total assets of the business along with the total liabilities of the business.  The difference between the assets and the liabilities is the owner’s equity in the business.  The balance is a snapshot picture of the health of the business on the day the balance is prepared as of.   Balance sheets adjust daily as the cash on hand varies as do liabilities as they are paid off or accrued over time.

Assets

The first part of a balance sheet lists the Assets.  The assets include the cash in bank accounts and other property owned by the business.  Two main types of assets are current assets and fixed assets.  Current assets are the type of assets that can be made liquid in less than 12 months time, and fixed assets are those are not easily liquid, such as equipment, real estate and leasehold improvements.

Liabilities

The second part of a balance sheet list out the Liabilities in the same fashion, short term (aka current liabilities) and long term liabilities.  Short Term liabilities includes Accounts Payable, while Long Term Liabilities include things such as warranty obligations.  Liabilities are debts and obligations that the business is responsible for.

Cash Flow

Cash Flow is another important term to understand when preparing to apply for a loan or line of credit.  Cash flow to you may mean profits, but from the banks’ perspective it means the ability of the business to repay debts, support the on-going operations of the company and meet the owner’s personal demands.  For example, if you are trying to get an SBA acquisition loan,  the bank will factor in how much you personally need to live off of, how much the repayment of the proposed loan is going to cost the business, and how much on-going working capital is needed.   So, with numbers, let’s say you need $120,000 annually to support your personal household, and the loan repayment annually is going to be $60,000, and the business needs another $40,000 annually in set aside profits for capital improvement accounts, the total of the above three is $220,000.  Now let’s say that the business has a track record of profiting $250,000 annually, will the bank feel comfortable extending the loan to the buyer or owner of the business?   Probably not, because even though there would be $30,000 left over on an annual basis, that would be too small of a margin for error for a bank’s comfort.  One tip you can take away from this, is to not bite off more personal debt if you are in the near term planning stages of buying a business, or attempting to get a Line of Credit or Working Capital for your business.

Collateral

Collateral are assets owned by the business pledged to the bank in the event that the business is not able to pay off it’s loan.  If you are doing an SBA 504 loan, then the typical collateral is the real estate involved in the purchase.  If you are doing an SBA 7A loan, the collateral is typically the business property (FF&E etc.) and frequently also a piece of personally owned real estate is also pledged.  Collateral is important to getting loans, as banks want easily liquidatable assets to sell off to minimize losses on loans in case of non-repayment.

Leverage

Leverage is a term used to describe how much debt your business has relative to its assets and cash flow.  Long story short, banks will be less likely to lend the more leveraged you are.   For a variety of reasons, if the business is already quite heavily leveraged, then the collateral is likely to be already pledged elsewhere, and the business has a smaller margin for error when it comes to repayment.

Underwriting Committee

The underwriting committee is the group of people in the bank that make the final decisions on the loans approved by the bank.  Most of the time, you will be interfacing with someone from the bank who is not on the underwriting committee when you are preparing and submitting your application.  This is especially true if you are working with a big name bank, which is another advantage with smaller regional or community banks.  Make sure when you are given updates about the progress of your loan application that you get them from the underwriting committee.

For More information on how Just Elementary, Inc., Commercial Business brokers can help you navigate the bank financing process, please contact our Client Care Manager, Sonia Chhabra, (888) 926-9193 or email cs@justelementary.com