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Business Loans & Commercial Finance

Understanding the lending landscape — from the four stages of business development to choosing a bank, loan criteria, and financial analysis.

The Four Stages of Business Development

Stage 1: Start-up

The business is a startup. Seek informal investors: local development corporations, government micro-loans, private foundations, credit unions.

Stage 2: Plan & Samples

Has a business plan and product samples but no reserves. Still seek informal investors.

Stage 3: Pilot Programs

Full business plan and pilot programs in place. Approaching readiness for commercial banks.

Stage 4: Documented Revenue

In operation with documented revenues and expenses. Ready to approach commercial banks and conventional lenders.

Choosing a Bank That's Right for You

Two main objectives when searching for a new bank:

  1. Find a bank aggressively seeking new business (watch for extended advertising campaigns)
  2. Choose one where you can develop a personal relationship

Look for smaller banks with just a few offices. They tend to be more aggressive, more lenient on qualifications, friendlier, and more personalized. They don't have large loan committees that shuffle papers. Big banks have forgotten that the customer is number one.

Three Reasons to Borrow

  1. Purchase assets — short-term (inventory, repaid when sold) or long-term (equipment, buildings)
  2. Replace other credit — repay borrowed money or pay suppliers promptly for discounts
  3. Replace equity — buy a partner's share when you lack the capital

Business Loan Checklist

  • All seven steps from the 7-Step process completed
  • Business plan
  • Corporate resolution to borrow funds
  • Year-to-date profit and loss and balance statement
  • Cash flow projections for the next 12 months
  • All business and personal credit reports
  • Bank and trade reference sheets
  • Collateral sheet

Business Loan Criteria

  1. Purpose of the loan — must fit within your business expertise
  2. Amount required — be specific. Take what you need and double it.
  3. Repayment plan — detail how you'll repay
  4. Collateral — what you'll pledge as security
  5. Personal financial statements — for principals owning 10-25%+
  6. 2 years audited financials — prepared by CPA
  7. Accounts receivables & payables aging reports
  8. Business plan — market, management, line of business

Financial Ratio Analysis

Lenders use four primary categories of financial ratios:

Profitability

Gross Profit Margin = (Net Sales - Cost of Goods Sold) / Net Sales

Operating Profit Margin = Operating Profit / Net Sales

Liquidity

Quick Ratio = (Cash + Securities + A/R) / Current Liabilities

Current Ratio = Current Assets / Current Liabilities

Leverage

Debt Ratio = Total Liabilities / (Total Liabilities + Capital)

Turnover (Operating Cycle)

Collection Period = Avg A/R / Net Sales × 365

Days to Sell Inventory = Avg Inventory / COGS × 365

Days Purchases in A/P = Avg A/P / (COGS + Inventory Change) × 365

Advantages of Business Loans

  • Red carpet treatment — business owners get their own section and line at the bank
  • Less frequent payments — some institutions allow annual payments
  • Easier renewal — just fill out a form vs. full reapplication
  • Lower interest rates — leaves more for other business needs
  • Easier to obtain — lenders prefer businesses (multiple income streams vs. one)

How Loan Requests Are Reviewed

The banker is primarily concerned about repayment. They'll consider:

  • Sound credit-worthiness (credit report, work history, references)
  • Loan proposal and business plan quality
  • Sufficient cash flow for monthly payments
  • Personal investment of 25-50% of the loan amount
  • Sufficient experience and training

Remember: a lender will not finance 100% of your business.

Reflect

Which loan type fits your current need? What documentation do you need to prepare?