Commercial Loans - Understanding the Process

Commercial loans are not your average payday loans. People who seek commercial loans have a business plan in mind; from rental properties like condominiums or duplexes, office expansions or relocations, manufacturing facilities to a local sub or pizza place. Capital is needed and sometimes lots of it! Some Commercial lending institutions include:

Small Business Association (SBA) - governmental business lending.
Bank of America - touted to be the number one SBA (Small Business Association) lending institution.
Wachovia - Personal and business financial services.
Ditech -Mortgage lender for personal and business.
Lending Tree - Multiple loan quotes for personal and business.

Before you contact a commercial loan institution, get prepared. To acquire a commercial loan takes time (from 30 to 60 days or longer) and the better prepared prior to submission of application, the less time the process will take. In general, the necessary paperwork needed to submit with the loan application includes:

Business profile:

This document describes your business, including annual sales, number of employees, length of time in business, and ownership.

Business plan:

A business plan is particularly important for new businesses, as they lack a track record. Your plan should convey all important facts about your business in a concise manner and should include financial projections for the first 24 to 36 months. Your local Chamber of Commerce has excellent guides to business planning and experienced people to guide you through the planning process. Take full advantage of their services if you have never set up a Business Plan for your new company.

Loan request:

This document should detail the amount of money requested, how the funds will be used, the type of loan and the amount of working capital you have on hand.

Collateral:

Describe what will be used to secure the loan, including equity in the business, borrowed funds and available cash. Commercial loans usually lend from 70% to 80% of the requested amount so investment capital will be needed.

Personal and business financial statements:

A Certified Public Accountant is invaluable here. Unless you are starting a business, most companies already have a CPA retained and he/she can provide necessary financial statements for your submittal. Usually anyone owning 20 percent or more of the business, partners, officers and stockholders will have to complete a schedule of current debts with balances, payment schedules, maturity and collateral used to secure other loans. Lending institutions want to know that their loan will be repaid and will acquire all collateral necessary to assure that repayment.

There are some common credit factors required for acquiring a Commercial Business Loan:

1-Credit history: One of the primary factors Commercial lending institutions look at is the condition of your personal and business credit. Before starting the Commercial Loan process, check all credit records for mistakes and resolve any discrepancies. Check any unfavorable records on your personal credit records (identified by your social security number) as well as any records for your business (identified by your Federal Identification Number).

2-Vested interest: Lenders want to know that you will work hard to make your business a success. When a lender sees that you have invested your own money in your venture, they will assume that you will work harder for success.

3-Working capital: Working capital is your current assets less your current liabilities, or cash on hand. A lack of adequate working capital increases the risk that your business will fail and makes lenders less likely to issue you a loan.

4-Ability to pay: Lenders like to see two sources of repayment; cash flow from your business and a secondary source. They will want to look at personal assets and liabilities, personal tax returns for the past three years, balance sheets for the past three years, profit and loss statements for the last three years and accounts receivables and payable aging. If your business has been consistently profitable you have a better chance of getting a loan.

5-Experience and character: With few exceptions (franchises are a notable one) you should have experience in the type of business you plan to run. If you do not, lenders will expect you to hire or partner with people who have appropriate experience. You should be able to show business acumen and managerial experience.

Conclusion:

Obtaining a Commercial Loan is a tedious process and not one to be undertaken lightly. Proper planning and diligent work will pay handsome rewards. Do your homework. If you are going to be a business, then be a business.

Sources:
www.sba.gov
www.bankofamerica.com
www.lendingtree.com
www.wachovia.com
www.ditech.com
www.alllbusiness.com
Personal experience