The Process of Commercial Credit Application
Applying for commercial credit could be a tedious endeavor. It requires more documentation than you would have initially expected and is certainly more complex than applying for consumer credit. For the lending institutions, it means customizing the loan to suit the needs of the business.
One of the best assets that you could bring to a lender is a well thought-out and documented business plan or proposal. You have to state the purpose clearly for the loan. Will the money be used for buying equipment, temporary working capital, expanding etc? You also have to state the amount of funds needed and for how long. Also a repayment schedule has to be submitted.
The business proposal should include the following information:
•A business description that makes clear the nature of the business, the product and the market. It should also identify the customers and the competition.
•A personal profile that outlines the background and experience of the principals in a resume.
•A proposal that state the type of loan being bespoken and its purpose.
•A business plan that outlines your corporate strategy for the next 3 to 5 years. It will aid you and the lender in making a determination as to whether the business will generate the cash flow needed to repay the loan.
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•A repayment plan that tells how you plan to refund the loan. It should outline some type of repayment schedule. The lender will be expecting repayment of the borrowed funds from profits produced by the business. Alternatively, as a contingency, it may be necessary to build and furnish a plan as to how repayment can be made on the loan if the profits from the business were deficient.
•Supporting documentation which should include copies of pertinent papers that support information contained in the loan proposal. Some of the documentation could include a lease, certificate of incorporation, partnership agreement, reference letters, contracts, invoices or vendor quotes.
•Collateral that you will use to secure payment of the loan. It could include business and personal assets such as equipment, inventory, accounts receivable, existent estate, stocks, bonds and vehicles.
•Financial statements of both the business and personal. The business financial statement should be provided for the last 3 to 5 years of operation. It should also include a year-to-date interim report. A balance sheet including assets and liabilities with a profit-and-loss statement that shows revenue and expenses should also be included. The lending institution uses this information to calculate a debt-to-worth ratio for the business. Additionally you should be prepared to provide copies of tax returns for the business within the same period.
•Lending institutions will do careful examinations of your financial statements and business projections. As the borrower, you must be fully prepared to responded questions about it.
•Personal guarantees from the owners or other principals, is usually required even from a more established business.
Applying for commercial credit is more complex than applying for consumer credit. It requires more planning and documentation. In addition the lender has to be able to customize the loan to fit the needs of the business. Having a well-thought out business plan or proposal can make the difference in terms of being approved.
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