As 2012 passes us by and 2013 becomes reality, Business Owners are wondering what changes will take effect be in 2013 compared to 2012. Our answer is simple, a lot of the same old same old.
- Lenders are always introducing new programs to entice Business Owners to apply, but the lending guidelines will not change. That is, as our April 18, 2012 article (http://sbclending.wordpress.com/2012/04/18/hello-world/) states, the 5 C’s of credit will very much be in effect. Lenders will continue to be strict in order to minimize their risk.
- While lending guidelines continue to remain tight, Business Owners SHOULD always be thinking of ways to grow their customer base. Certified Companies will always have more opportunities then non-certified companies. That is, the Government has reserved new opportunities only to those businesses that are certified. Intern, those who are not certified will not be able to bid on that job. Here is a link to our Certifications page, we hope you will find it helpful.
The subject of our first article was about the 5 C’s of Credit (Character, Capital, Capacity, Collateral, and Conditions). In addition to credit, lenders are looking for businesses that are financially stable, which I will discuss below.
Lenders prefer to do business with existing companies due to their multiple years in business. Lenders prefer this route because they can track the progress an existing business has made over the years, which is done in multiple ways:
- Collecting previous years tax returns
- Tax returns are the only official document which allows the lender to see how much a company has made in the past. Cash flow is a term used by lenders to determine pay back ability. Gross receipts will show the sales of a company, but the net income will show the companies profit after expenses.
- In some cases, companies are making more then is being reported to the IRS. A few weeks ago, a client who owns a coin laundry business contacted me for a loan. Client claimed to make over $1,000,000 in sales. His tax returns however showed revenues of $20,000 and a net loss of ($10,000). When I asked the client what happened to the $1,000,000 in sales, he replied “we are a cash business and don’t report the income.” As you can imagine, this was a problem. Since he is receiving cash, he is not reporting the income to the IRS and therefore it is not being reflected on their business tax returns. Since the tax returns are the only reputable report to verify income, the lender can not take his word on his total sales.
2. Financial Statements
- The profit and loss statement: During any given year when the company has not yet filed for their taxes, the profit and loss statement will allow us to see the year to date revenues and expenses of the company. This will give us a good idea how the company pairs up compared to previous years. I would ask this document to be prepared by a CPA for authenticity.
- The balance sheet: It will give us a good idea where the company stands with their assets and liabilities thus giving us the eventual net worth of the company. This document is important to see how the company manages its debt. It will show all assets compared to its liabilities giving us either a negative or positive. A negative net worth tells us that the company has more debts then assets which means they owe more then they own. A Positive net worth tells us the company owns more then it owes. This should also be verified by a CPA.
The above mentioned items will allow us to get a grasp of a companies pay back ability. There are however, other documents needed while processing a loan. They include but are not limited to:
- Business debt schedule
- Personal financial statement
- Personal Tax returns
Since new businesses can’t provide tax returns from previous years, it is crucial to have excellent credit and a sound business plan when applying for a loan. All new business owners must realize that having great credit is crucial when requesting for financing. The following two items are just two of the most important items needed for New Businesses. However, when getting a loan package together there will be additional items requested.
- As our previous article states, credit will determine how risky you are to a lender. Hence, having a low credit score will give a lender the impression that you are not trustworthy. Therefore, understanding your credit report, how much you owe on credit cards relative to the limits on those cards are important. Lenders will take in to consideration how much debt an individual already has. The lower debt you have the less of a risk you are to lenders.
- Also, having a high credit score does not necessarily mean that you will get approved. The days of approving based on your score are over. Lenders now are more interested on what makes up your credit score and will want to make certain that your credit report is clean.
- Example: I received a call from a client who had just moved to the states a few years ago. He does not have any credit cards but does have a vehicle he is leasing. He has never been late on his payment. His credit score is a 720, a respectable score by today’s standards. The client wanted to start a business with some money he had been saving and inquired about a Small Business Loan. When I asked for his credit report, I saw that it wasn’t much of a report. The only reported credit he had was the lease on his vehicle. I advised the client not to apply for a loan, but rather begin building his credit by obtaining small credit cards. By using and paying them off every month, he would have established credit slowly. He did however decide to apply for the loan and not take my advice. He was declined!
- Why did this happen? The main reason for the decline was due to lack of credit history. The client did not have enough credit at the time for an approval. Lenders are looking for business owners to have a good amount of years behind them borrowing and paying off debt.
2. Business Plan
- A business plan is crucial for start up companies because it is the only way to show a lender how they will be repaid. Thus, creating a sound business plan will be crucial in obtaining any type of financing. A business plan should explain everything about the business and its owners. A business plan can be the determining factor of an approval or a decline.
- Creating a Business Plan takes effort and time. Our last article outlined the Table of Contents we feel is crucial in creating a great business plan.
- Please visit our business plan link on our website http://sbclending.com//services-business-plans.php
Paul Mazbanian (2011 SBA Young Entrepreneur of the Year – Los Angeles District Office)
What is the secret for receiving an approval for a Business Loan?
There are 5 critical characteristics a lender takes into consideration for businesses seeking a loan, commonly known as the 5 C’s. Although many know what they are, below is an explanation of each specifically from the perspective of the lender.
- Character: The most important tool a lender uses to determine how risky you are is your credit history. It enables lenders to see your history of transactions and if you have been late or not on your payments. Your personal credit history is the best way to determine the reliability of your character.
- Capital: In addition to your credit, lenders will determine their risk based upon the project at hand. In a perfect world, lenders would like to have zero or the least amount of risk as possible. In most cases this does not happen, which is why lenders like to see how much money or capital you have personally invested into your project. The more you invest in the project, the less risk a lender takes; therefore the more likely your project will be funded.
- Capacity: The ability one has to repay the loan. Due to their short history, new businesses lack this. However, existing businesses can provide capacity by providing previous years tax returns. This is the only way to evaluate how the company has done in the past and to measure the potential it has to grow in the future. Nevertheless, new businesses can provide capacity through secondary sources of income or an outside source of revenue that does not come from the business, such as a spouse’s income or rental real estate.
- Collateral: Any individual asking for a loan should be ready to give up something to satisfy the lender. A lenders objective is to minimize risk and one way to accomplish this is by taking collateral. Collateral can include anything from equipment to real estate, depending on the amount of the loan requested. In some cases collateral is not necessary, but individuals seeking a loan in excess of $25,000 should be prepared to offer some form of security.
- Conditions: Conditions largely relate to circumstances that we have little to no control over. In recent years, the economic recession has been a condition in which lenders have taken a more conservative stand on lending and have instituted stricter guidelines. If your business is sensitive to economic downturns, lenders will want to know that you are competent at managing productivity and expenses.
Typically, lenders like to see a borrower secure 4 out of the 5 C’s when applying for a loan. This way, they can be certain that their money will be repaid in a timely manner and in full. If you do not secure 4 out of 5, then we recommend putting a plan together to map out how you will be securing at least 4 out of the 5 C’s in the future.
Paul Mazbanian (2011 SBA Young Entrepreneur of the Year – Los Angeles District Office)