June 29, 2012

Business lending is tight right now, even for companies with existing loan officer relationships. It’s more important than ever to submit a complete loan package.

Besides making the process smoother, a well-executed presentation will testify to your professionalism and ability to make your business successful.


So what do you need to include? The following discusses how a loan officer evaluates your proposal.

The first hurdle is some initial number crunching. For a lender to make a loan, there needs to be sufficient existing cash flow to cover all debt.

Using your most recent business tax return, add back non-cash items like depreciation or amortization, interest and other one-time or discretionary items, such as owner bonuses. That’s your available cash flow.

Next, calculate your new loan payment amount by inputting amount, term and estimated interest rate into an online amortization calculator. Add a year’s worth of those payments to your existing annual loan payments.

Then divide the available cash flow by the total annual debt payment amount. The result is your cash flow coverage. Banks like to see 1.15 to 1.35 in coverage, and they usually go back three years and average it.

What if your coverage is too low? Then the logic of your business plan and financial projections is even more critical.

Depending on the size and complexity of your business, a plan can be two pages or 100 pages. It’s not the length so much as the need to address key success factors and strengths of your business as well as honestly discuss your present situation if it is weak.

You must have a solid, well-reasoned plan of how the debt will build sales and reduce costs – or a combination of those.

Back up your assumptions with information from past performance, industry outlook and market trends. The idea is to mitigate the perceived risk of the loan with the intangible, but crucial, ingredient of your business management expertise in meeting your company’s challenges. A business plan should discuss every aspect of your business, including history, product or services, employees, management and financial performance.

Accurate and defensible cash flow projections are another important part of the package. Using past history as a guide and adding in the projected new activity you anticipate after the loan, prepare statements of cash in and out for one year at minimum. Some lenders want to see three years.

In preparing the projections, just adding percentage increases to revenue isn’t enough. You need to understand the building blocks that make up your revenue picture and assess their growth.

For example, what is the outlook for each of your customer segments? What percent does each segment contribute to your revenue?

Remember to show your loan in the projection – both the new cash and the areas where it will be spent – e.g., new employees, equipment or marketing expense. Preparing good projections is hard work, but you want to be prepared to answer the dreaded question, “Where did this number come from?”

Other items for the package include:

  • The last three years of personal and business tax returns
  • Summary source and use of funds for loan project
  • One year of bank statements
  • Management resumes
  • List of assets and depreciation schedule
  • Real estate tax assessments
  • Articles of incorporation
  • Business licenses
  • Relevant leases and contracts
  • Audits or previous appraisals, if available

You can find business plan and cash-flow templates at your local Small Business Development Center office.

This article was originally posted on June 29, 2012 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com.