Preparing to Borrow Guidelines
Borrowing money for your business is a serious step. Use these guidelines as a tool to evaluate your business and plan for its success. The proper preparations can strengthen your business and strengthen your case for borrowing.
Reasons for Borrowing
Every potential lender will want to know the purpose of the loan. As with personal borrowing, potential lenders will look more favorably if the funds are going to be used to produce lasting value for the business. A loan to expand the business to meet the needs of a signed contract with a major customer will be more attractive to a lender than one where the proceeds would be used to meet ongoing operating payroll needs due to a slowdown in the business.
Build a case for how the funds will enhance the short-term and long-term results of the business.
Borrowing From the Right Source
When you are just getting started you may opt to fund much of your startup costs either out of pocket or with a credit card. Arvest offers both personal and business credit cards, as well as a Rewards Program.
Arvest has lenders that are accustomed to making loans to businesses of many shapes and sizes. If you are a customer and we already know you, your business, your industry and potentially your customers, we may already have a great deal of the information we need to make an informed lending decision.
If you expect to use the funds to purchase a piece of equipment, you may want to discuss equipment leasing options with our Equipment Finance specialists.
Type of Loan Sought
Does the repayment term of the loan match with your expected cash flow? For example, will receipts from your receivables enable you to meet the payment terms.
Be prepared to offer collateral that is tied to the purpose of the loan. Getting a loan to purchase a large new machine may require you to offer a security lien on the machine as collateral.
Depending on the size of your business, you may want to investigate a Small Business Administration loan. The SBA encourages lending to small businesses by guaranteeing parts of loans made to businesses of certain sizes where the proceeds are being used for certain purposes. You can talk to an institution offering SBA loans to learn more. While the paperwork and time frames may be onerous, this may be an option to consider. Arvest is part of the SBA Preferred Lender Program which can help to expedite the loan application process.
You will be required to complete a loan application which will require corporate and perhaps personal financial information. In addition, you will probably need to provide:
- Tax returns for the business for the past couple of years.
- Potentially, personal tax returns for the past couple of years.
- Financial statements for the business for the past couple of years and a year-to-date statement. The lender will probably want both income statements and balance sheets. They may also want detailed information on accounts receivable, accounts payable, investments and fixed assets.
- A historic cash flow statement along with projections for the current year.
- The lender may also want copies of significant contracts with customers and vendors.
- Other important information such as patents or key proprietary information.
Your business plan should play a major role in your decision to borrow and may play a major role in a lender’s evaluation of your loan request. The major components of the plan should include:
- Business description
- Marketing strategies
- Competitive analysis
- Development plans
- Management plan
- Key personnel
- Financial information
- Other important information
Be sure your plan is up to date and provides all the information we may need to understand your business and make a fully informed lending decision.
We will want to understand how you run your business and you should be prepared to answer these questions:
- Do you have a credit policy and is it enforced?
- Does your accounting system adequately show the condition and results of your business?
- What is your accounts payable policy? Do you negotiate favorable terms with key vendors prior to placing of orders? How current are you with payables? Do you take advantage of discounts for prompt payment?
- What type of insurance coverage do you have? Is there adequate insurance for liability and property damages?
- Are all your payroll, property and income tax filings current?
- Do you use the services of a qualified tax professional to help ensure that your tax benefits are maximized?
Are you ready to take the next step and borrow money for your business? Hopefully the above tips put you in a good position to get started.
If you have any questions, contact one of our experienced Arvest business specialists.