How to get a business loan?  

Before approaching a financial institution for financing your business, it's important to identify and organize your request. We like it to think of it as:

• How much?
• For what?
• How Long?
• How will it be repaid?
• What is the collateral?

These five simple questions will steer much of the discussion on what type of loan your business needs and ultimately position your company well for the underwriting and approval stages of your business loan request.

A great example is a Minnesota small manufacturing business that has been seeing great growth but needs to add some heavy machinery to their line to reduce costs and improve speeds. Their overview may be:

We are reaching out today for a small business loan because we want to buy a $500,000 piece of manufacturing equipment to reduce our expenses by $100,000 over the next 12 months and improve our throughput times. We expect the useful life to be 10 years and are looking for a seven year loan. The repayment will come from existing cash flow and cost savings. We are willing to pledge a purchase money security interest in the equipment and potentially all business assets of the business.

Another example that we see often is when the business is looking to acquire real estate:

We need a real estate loan for our small business to buy a 24,000 SF office/industrial building in Anoka, MN for $1,500,000. We expect the purchase to reduce our long-term facilities costs as we move from leasing our current space to owning our new space. The building was built in 2001 and is in good condition. We have some small improvements we will need to make that will cost us $250,000 so that our business can move into the space as desired. The new building should be large enough to support our business requirements for the foreseeable future and we plan to repay the loan with our business cash flow and rental savings.

The two examples provide a quick and easy overview of the request. Our lender will use this as he or she meets with you to discuss and work on a customized proposal.

Banks need to review financial information to understand the history of results and get a snapshot of how your business is trending. If you are looking for a startup loan or new business loan, we will rely more heavily on strong personal credit, management experience and collateral to underwrite and review your request. So let's get started with what you will need to prepare:

Brief history of company, ownership and management

We're interested in not only the financials but also the story of your business. It's one of the best parts of being a relationship bank. This allows us to provide customized and creative solutions to meet your needs. The business's history, the management experience, and the breakdown of ownership allow us to better understand the character of the business.

Three years business and personal tax returns

At Security Bank & Trust Co., we use your business and personal tax returns to gauge your capacity to repay the loan requested. Net income, depreciation, interest, liquidity and capital are all used to understand the numbers behind the request. A great tip when providing your information is to note any one-time items that may have affected your results both positively or negatively. Examples could be a customer charge off or alternatively a major non-recurring sale. Our goal is to understand the stability of the cash flow so we can accurately forecast cash flows on a going forward basis.

A current personal financial statement of the primary principals and/or guarantors

It's common for Security Bank & Trust Co. to get asked why do we need a personal financial statement for a business loan? We do because it allows us to better understand the overall financial profile of the business and its principals. We like to see both financial profiles are stable and cash flow positive. Furthermore, it is more often than not a guaranty from the principals is required.

A current income statement and balance sheet

We understand your business is operating in a dynamic market and has a changing customer base. We also notice that often tax returns are completed months subsequent the end of year. A current income statement and balance sheet allow Security Bank & Trust Co. insight into how the business is operating today. Did you sign a material new customer or lose an existing customer? What's the current sales activity? Have you acquired any new business equipment or do you have depreciated equipment that could be used as collateral? Be honest and as complete as you can. Providing incomplete data only delays the decision and hurts everyone's ability to get a quick, reliable proposal.

Sales, accounts receivable and accounts payable concentrations

A common risk with any business is concentration in sales. At Security Bank & Trust Co., we are most interested in any of your sales concentrations above 10% of your gross sales and concentrations in your accounts receivable. Likewise, we want to understand how the company is sitting with their accounts payable and will generally look closely at your accounts payable report as part of the underwriting process to review the amount of accounts owed and any concentrations. As a result, it's good practice to have a sales concentration report prepared along with aging accounts receivable and accounts payable reports.

Purchase agreements

Providing the purchase agreement or invoice to Security Bank & Trust Co. as part of acquisition financing of the equipment and/or real estate allows Security to understand what exactly is being acquired and at what terms. We request the purchase agreement to verify the purchase but also because there are soft costs that are sometimes not financeable with debt proceeds. These are usually costs such as legal, commissions, etc… that don't provide tangible value to the item being purchased and are more transactional in nature.

Click here for a complete copy of our commercial loan applicant checklist.

After reviewing the business loan guide, it's easy to understand why preparation speeds the loan application process. Organized information allows for streamlined processing and more in-depth discussions to help both you and the bank structure a valued partnership.

The basis of a good relationship is building trust and rapport. Likely by the credit underwriting stage, we've received the requested information and had a meeting to discuss the business, its plans, and the subject request. Our goals with the underwriting process are to verify the information received for accuracy and assess the inherent risk of making the loan that may not have been readily apparent to the lender. This is where keeping organized and detailed financials becomes a strength to your business and your loan request. We want to keep the process streamlined so we can get you a reliable and quick loan proposal for your new project.

"Casa began its relationship with Security Bank with the opening of its 4th location and first franchise, Edina-Centennial Lakes. Security was pivotal in the launch of this location, and of the franchise company. It has been a joy to work with each member of the local team on everything from financing to account setup."

Natalie Standridge Founder & CEO Casa de Corazón

Our credit department takes pride in completing an efficient review of your overall business and personal financial picture so we can provide valuable insights into your business along with your proposal. It's not uncommon to find our lenders providing trusted advice which has saved our customer's time and money.

Key metrics to keep in mind for the credit underwriting process:

• Debt Service Coverage Ratio = Earnings before Taxes, Interest, Depreciation & Amortization / Debt Service Payments
• UCA Cash Flow Coverage Ratio = Net Cash after Operations / Current Portion of Debt + Interest Expense
• Current Ratio = Current assets / current liabilities
• Quick Ratio = (Cash and equivalents + marketable securities + accounts receivable) / current liabilities
• Net Income to Industry Peer Average
• Debt to Tangible Net Worth Ratio as compared to Industry Peer Average
• Profit Retention Trend = Net Income less Distributions/Dividends
• Revenue Growth Trend
• Loan to Discounted Value

We understand and appreciate that these are not necessarily key success factors to your business but they are some of the key metrics banks like Security use to measure your success and credit worthiness.

As part of the request and resulting analysis, Security reviews the options that are available to your business. In some cases, the transaction is a simple equipment or real estate loan transaction; while in others, the transaction can be rather complex and require creativity and customization to accomplish your goals.

Security will look at all the options, as outlined in this Business Loan Guide, including working with local municipalities like Minneapolis's Community Planning & Economic Development business loan programs or St. Paul's business financial assistance programs . Our experienced lending to many industries like professional services, construction, investment real estate, and nonprofit organizations also gives us the knowledge to provide a thoughtful proposals to accomplish your goals. So what are some of the loan options for your business?

Business Line of Credit

A business line of credit gives you cash to meet a whole variety of business needs. Draw on your business line of credit to buy inventory, get more working capital, refinance other debts, handle seasonal cash flow gaps or take advantage of a short-term opportunity. A business line of credit is generally interest only and carries a variable loan rate with a term up to 12 months. The availability of the line of credit is based on the collateral provided. It can be equipment, accounts receivable and/or inventory that is often times subject to a borrowing base certificate and regular reporting.

Business Term Loan

One of the most traditional methods of business financing is the term loan. Business term loans are generally used to make long term capital improvements in your business, including the purchase of fixed assets, investing in tenant improvements, acquiring new businesses, and/or investing in new technologies. A business acquisition loan is often a business term loan. In this loan option, you receive a lump sum payment and pay it back over a specific period of time, also known as the amortization period. Interest rates can be either fixed or variable rates.

Business Real Estate Loan

If your business is acquiring or refinancing real estate for investment or for occupancy, a business real estate loan is for you. The loan can take many forms: construction, term loan, or line of credit and as such, you can expect to see both fixed and variable rates. Usually for a commercial real estate loan you will not see fixed rates longer than 15 years and in many cases borrowers go with a three or five year fixed rate. Leverage is usually up to 75-80% of the property's value with amortizations over 15-25 years.