Help! How do I get a loan for my small business?
Growing your business is exciting, but it also brings a new set of challenges. Where do I get the money? Will I be approved? How long will the process take? We interviewed two of our commercial lenders, Scott Jarvis and Kade Hoppenworth, to get their perspectives on the questions business owners like yourself are asking.
1. What information will I need to provide for a loan?
Scott: There’s two different parts. There’s the financial side, and then there’s the legal documents side. Each one is equally important. The financial side is obviously what we use to determine if we’re going to extend credit and approve the deal or not.
So on the financial side, I typically ask for three years of full business tax returns, including three years of financial statements, year-end financial statements, because they are a little bit different, and accounts receivable aging and accounts payable aging financial statements. All of those should be from around the same date.
Then I obviously ask what the ownership percentage breakout of the company is. If it’s a sole owner, 100%, then I ask for theirpersonal tax returns as well. I ask for the last three years that mirrors the three years that I gathered, and then I ask for an updated personal financial statement, something that’s dated less than 6 months old. If the business has multiple owners in it, anybody over 20% I would ask for an updated financial statement for each of them as well.
There’s a fine line between asking for the moon, asking for too much, and then not asking for enough where you have to keep going back a couple times. You’re always kind of playing that game.
Kade: For starters we’d need to gather your traditional financial information, especially if this business has been in operation for a couple years. We need to get past financial information that includes tax returns, profit/loss, and income statement as well as an updated balance sheet.
If a current business is looking to expand operations, maybe purchase additional equipment, then we’d like look at a business plan; a brief write up on the background of the company, sources & uses of funds, and projections.
When creating projections, they should make sense. Do the projections seem feasible? Does the owner have a good grasp on estimated sales and expenses?
2. How does the review process work?
Kade: After all the financial documentation is collected, it will go to a review process. The turn around time for approval will be determined depending on the size of the loan. The review process will consist of analyzing the financial data, loan structuring, and approval (timeliness will depend on size of the loan and complexity for different approval channels).
Scott: Yeah usually I kind of give them an idea of timing of a couple weeks or so. That gives me about a week to review it. Depending on the size of the credit, there’s different approval levels that will need to go into certain loan committees and then it might take a little bit longer. But usually we can get them a nice solid proposal here within a week or so.
3. Why do I need to provide my personal financial details?
Scott: Well, one reason is if the company hasn’t been in business overly long, we have to be able to have some personal support. The biggest thing I always tell people is it’s a way for us to get a better understanding holistically of what the company is producing and where the flow of cash is. That’s the biggest thing, whether it’s cash you’re putting into the company vs. cash you’re taking out.
And the personal financial statements are going to help show us that global picture of where you’re at which will obviously help us in determining the overall approval and the interest rates that you’re looking for as well.
Kade: We want to know the guarantor’s strength so we can continue to assess risk if the business is looking to borrow money. We look to see how the company will be able to handle adversity if something were to happen negatively and if the guarantor personally can assist in getting through difficult times. As the bank, we want to know if something were to happen, does the personal borrower, the guarantors, or the business owner(s) have the capacity to also assist when the business may take a downturn.
We use financial strength to look for character and things to help determine the risk associated with the loan request. If it’s a situation where we look at the borrower’s personal financials and we realize that person is very leveraged or has low liquidity, then that’s also increased risk on our part and that will affect the approval.
4. What surprises business owners the most about getting a business loan?
Scott: Two things. One, the amount of information they have to provide, because it is a lot. And two, the length of time it takes. The first one, if we’re going to be prudent lenders and make sure we’re underwriting things appropriately, we have to have that information. And every bank is going to ask for the same information if they’re doing their job at any credible level. That stuff is just pretty much standard.
Those are the two biggest surprises. Interest rates and such are more of a negotiated thing, and most banks are all going to be within a half a point, quarter point of each other because we all price, more or less, off of the same information.
Kade: Yeah for most it’s definitely the process. They may feel the process is a little cumbersome at first if they’ve never gone through it. The timeliness will depend on what type of loan they’re looking for (equipment financing, real estate, etc.). I think we do a good job of handling everything in the background to make it as easy as possible for the client so they don’t feel any of the burdens.
5. How can Lincoln Savings Bank help my small business?
Kade: I would say the biggest factor with a client and banker is the relationship. Having a trusted relationship between the two parties and knowing the business is very important, as well as always being available when needs arise.
Scott: Good question. That conversation comes up early on in the process. One thing I always tell a new client is that we’re very purposeful about bringing our network, our customers and our people that we know well, into our new customers that we bring on.
What that means is introductions, getting to understand what your role is and where you want to go with this company, whether it be new products, new territories, whatever it is that you’re looking for. Then what we purposefully do is we try to make it a collective network internally where we introduce everybody and try to help spur some business internally.
The biggest difference is a lot of banks don’t necessarily do that, or they’re either not purposeful about it. They don’t intentionally set up meetings with customers to introduce them and that sort of thing. We’ve done that quite well in our three and a half years of growing in Des Moines, and that’s just reciprocated a lot of business with our current customers.
6. What’s one additional piece of advice you would offer business owners?
Kade: I would say build a great relationship with your banker. Having a trusted relationship where your banker knows your business in and out just like you do is crucial. When your banker is only one call away when needs arise. you can trust that you’re going to be able to get the loans you’re looking for in a timely manner without much hesitation or second guessing.
Scott: My biggest thing is when a business is trying to grow in other areas, known as diversifying. Diversifying can be a good word as long as you’re as good at the new products as you are with your old products or your services. But it’s important to make sure before you take on that next step of advancement, whether it be a territory or new product/service, that you’ve honed in this initial product that got you to where you are.
That’s your bread and butter, and you just need to mitigate risk for the rest of it so it won’t jeopardize your bread and butter. And that’s a difficult conversation to have when you’re talking to an entrepreneur.
Scott Jarvis is a Commercial Lender in the Des Moines metro.
Kade Hoppenworth is a Commercial Lender in the Cedar Valley.
Contact Scott, Kade or any of our other commercial lenders through our contact form.
Lincoln Savings Bank, Member FDIC