17 Tips to Prepare for a Commercial Loan
You’ve heard the expression – presentation is everything. The concept is no different when it comes to securing a loan. Below are 16 fundamental ways on how to properly prepare for a commercial loan. It's always wise to get it right the first time.
Be organized – We will start this out with the most basic and fundamental tip - be sure to be organized before approaching any potential lender. And we're not talking just physically, but also mentally. Be sure to have your pitch ready, your documents ready, your books freshly updated, and other pertinent information prior to any meeting with a lender. It is wise to prepare for any questions or objections beforehand that may come your way from the lender regarding your situation. You must have a real viable and credible business strategy in place by the time the initial meeting occurs.
Research lenders - Do not put all your eggs in one basket. It is best to approach multiple lenders throughout this process in order to sift out the good from the bad. It is also an effective way to gauge your company's financial market value in the lending world to see what rates and terms you can actually qualify for. Also, when scoping out potential lenders, be sure to check their minimum requirements and criteria to see if you even pre-qualify before committing any further to a potential lender. Conducting these tasks are not easy and can be a real time consumer however, as most owners and management teams do not have the time to shop from one lender to the next in order to find the right fit, especially if the need is urgent. This is where SalemBridge comes in as the foundation is already laid out for you as we navigate the capital markets for you so you can focus on running your business.
Confident but not arrogant in your approach – “Pride comes before a fall” as the ancient proverb says – do not allow the lender to adopt this same impression about you. Nothing is a bigger turn off when the borrower knows more than the lender (supposedly), tries to talk over the lender or even tries to dictate the terms and conditions of the deal early on in the process. Be confident when disclosing the details of your situation with your lender even if the business is in decline, but do not assume you have the all answers (when you really don’t) and do not be overly hyper with your attitude. After all – your coming to them, not the other way around. Keep this simple tip in mind.
Have your documents ready – Before even thinking about approaching any lender, it is wise to have many files prepared as possible to streamline the process that is to come. This will save you much time and effort down the road. Be sure to prepare to submit updated documents and financials that are relevant to the type of financing you are requesting (for ex. AR/AP aging reports for factoring or equipment / inventory lists for Asset-Based lending). Recent financials such as a YTD and 1-3 year historical Balance sheets, P&L, and a Cash-Flow statements are always ideal for this situation. This not only helps the lender, but helps yourself as it will save you much valuable time and resources throughout this process. Do not make the mistake of preparing documents as you go along, this will only slow down the process and will lose you respect from potential lenders. Recent credit reports, tax returns and PFS (personal financial statements) are usually requested for most types of loans and commercial loans so it is a good idea to have them prepared beforehand and ensure they are as accurate as possible free from errors.
Executive Summary – Important item to have as it summarizes in simple terms what you are trying to accomplish and why you need the capital. The summary should address your company's basic business model, current situation, the market going forward, why you need the capital, how the new capital will improve the business and how you intend on paying back the loan. This is not a 65-page document but should rather be a 1-3 page document summarizing your current situation and your capital requirements. Having this supplemental item on hand from the get-go will show the lender that you have a real game-plan prepared and serious about moving forward if you receive an offer.
Be articulate and concise – Get to the point when discussing with potential lenders. They do not need to understand all the ins-and-outs of the business (unless asked), but rather more importantly – your current situation, how did you get there, your strategy going forward, and your ability to service the debt. That is what they are most concerned about. Do not be all over the place when discussing with lenders and bounce from one topic to the next unless asked - stay on path. Sometimes less is really more.
Know your numbers – It is wise to know your company’s financials and the drivers behind them to better articulate yourself. We understand you have a business to run, therefore this is where your CFO, CPA, or an independent advisor can be of great assistance for preparing for a new loan request.
Have a risk mitigation strategy in place – This is one of the most important but often overlooked elements of a loan proposal that any lender would like to see. A lender wants to know how your business is prepared to handle any type of business or economic calamity that could potentially occur in the near-future. This is also a good opportunity to display how your business can potentially offset or mitigate these risks as efficiently as possible without putting the business in jeopardy or your ability to service the debt. Having an viable risk-mitigation plan in place not only can bulletproof your business from any potential storms or obstacles but can also dramatically lower your chances as being deemed “high risk” by any potential lender.
Demonstrate your ability to pay back the loan – This is what your lender needs to know. This is also where your financial modeling and forecasting skills come into play. Try to accurately determine your anticipated future cash flows after all revenues and expenses have been accounted for and make sure you exceed the typical minimum DSCR (Debt Service Coverage Ratios) which typically hover around 1.25x. It is wise to hire an experienced advisor who can articulate this message and speak the language of lenders. SalemBridge does just that for our clients as we help them properly prepare for a capital raise and future market conditions.
Demonstrate your experience – It is important to highlight your team’s previous success and achievements in your market and any other challenges you had overcome in the past, especially ones that are relative to the current situation. Resumes of the management team should always be up-to-speed and ready to go. Also, do not be like the crowd by just listing your boring current/historical job descriptions and duties, but rather by emphasizing and highlighting the problems you actually had solved in the past can go a long way in this process.
Have an exit strategy in place – Having a viable exit strategy in place will bring added comfort to a lender and will show them that you have a succinct business plan in place on how you will exit/repay the loan with an reasonable amount of time. It is also helpful to have a backup exit plan in case things do not go as originally planned.
Plan for alternative financing scenarios – This correlates with your financial modeling expertise mentioned above. Even if you have all your ducks in row, its not always a guarantee that you will receive everything you had asked for or requested, for possible various reasons. Some of the other reasons a lender can deny a loan could be due to a current faulty market, trade risks, or some other macro-related reason outside of your control. However, it is a good idea to plan for several different funding scenarios to further help you prepare for either potential outcome and how you still plan to achieve your goals with possibly less favorable terms or capital available.
Vet the lender – We spend so much time trying to prove ourselves to lenders, but rarely give them a taste of their own medicine. With so many loan scandals and frauds out there, most of these could have been easily prevented with minimal extra effort due-diligence by the potential borrower or intermediary. Be sure to do your homework on the lender and always search online for any recent or past complaints or scandals the lender may have been involved with. If you happen to stumble upon a few cases, please also make sure that you thoroughly read the full details of a case or a complaint before dismissing a potential lender due to an unwarranted and a false smear campaign usually done by a competitor. Be your own judge when it comes to this and be extra careful. SalemBridge assumes this burden for our clients as we thoroughly vet our network of institutional and private lenders before bringing clients to them.
Ask them questions – This is a given, but there is no such thing as a stupid question, especially when it comes to a situation like this. I've seen many borrowers enter into bad transactions by not clarifying the details of the terms and conditions upfront. Have a list of questions prepared prior to any meeting with a potential lender. If you are unsure about any steps of this process, it is wise to bring these concerns to the forefront early on, rather than finding out later on after considerable amount of time and energy was spent on a single source.
Send them everything they request – Failing to send any requested docs will only delay the process. If they have requested a document that is currently not available, please advise them about this early on in the process. Sometimes concessions can be made if you are upfront and have a valid reason for doing so, but it is better to fully comply and meet their demands as the process will go much smoother and further increase your chances of securing the loan.
Complete every form - I see this all too often with many borrowers. Leaving part of a form blank without notifying the lender upfront or asking questions makes you appear lazy and incompetent in the eyes of a lender. I can tell you even from past experiences that every client that submitted a partially filled out app never received any money in the end, even after correcting or filling in the blanks later on after being confronted about it. It was a mutual feeling between the borrower and lender that the borrower was not a serious borrower. Don't waste their time. Do not be another victim to this subtle mistake. If there is something on an application that you do not understand, by all means, pick up the phone and notify the lender immediately. It may be a small tiny gesture, but it is certainly appreciated. You don't want them to be lazy with their money, so do not be lazy in your approach! It's only fair.
Look / Sound presentable - This one is self-explanatory and very fundamental. If you plan to meet physically with a potential lender in person, you don’t have to put on your Brioni Suit with your Berluti buckles but do tuck in that shirt and hide those holes in your clothes. If you want a lender to take you seriously, your appearance is a good place to start. For online or over the phone meetings, please have your notes ready and be able to articulate yourself and your situation as best as possible. Prior to a call or meeting, it is best to highlight bullet points you would like to cover with the potential funding source and will enable you to be more organized and prepared for the call and any questions that will come your way.
In Conclusion Some of the tips above are simple and self-explanatory, but were certainly addressed due to the fact that many potential borrowers still often commit these elementary mistakes. We know you have a business to run, but SalemBridge Advisors can certainly take this burden off your shoulders as we are experts at loan preparation and navigating the capital markets for you.
Please visit us at www.salembridgecapital.com for more information or contact us directly for a free consultation and guidance at (646) 926-4391.