A Comprehensive Guide to Secure a Business Loan from the Bank
I've helped 100s of companies get loans approved from the bank so it's not hard to me.
But for a business owner going through the process for the first time, it can feel like a maze sometimes - confusing and overwhelming.
Starting or expanding a business often requires financial support beyond what you might have on hand. That's where bank loans come in.
They're like a helping hand, giving your business the boost it needs to get to the next stage.
To help you get there, I’m laying out the loan process rundown from start to finish.
In this issue, you will learn:
- Every step of the loan process
Let’s go!
Assessing Your Financial Needs
Before you ask the bank for money, take a moment to think about what you really need.
Are you looking to expand your business, buy new equipment, or simply manage your cash flow better?
Figuring out your financial needs upfront will help you determine the right type of loan and how much you should borrow. Take some time to calculate how much money you need to achieve your business goals and how long it will take you to pay it back.
This is an important step because this becomes the core foundation of your loan proposal.
Prepare Your Financial Documents
The next step is to gather some essential financial documents. These documents help paint a clear picture of your business's financial health and justify why your business is worthy of getting the loan. Here's a few key documents to get you started:
- Financial Statements: Every business should have accountant prepared financial statements. This document summarizes your business's profitability, financial performance, assets, liabilities, and equity at a specific point in time. All lenders will require financial statements to support the loan request based on the trends of past performance.
- Financial Projections: Projections help forecast your business's future performance and cash flows. They demonstrate your ability to generate enough cash to cover your expenses and repay the loan on time.
- Business Plan: A well-crafted business plan outlines your business's goals, target market, competitive landscape, and growth strategies. It provides lenders with insight into your business's potential for success and how you plan to use the loan funds effectively.
- Tax Returns: Lenders may request copies of your business's tax returns to verify your income and assess your tax obligations. Make sure your tax returns are up-to-date and accurately reflect your business's financial status.
- Personal Financial Statements: For smaller businesses or new borrowers, lenders may require personal financial statements from business owners or guarantors to assess their financial stability and creditworthiness.
Preparing your financial documents may take some time and effort, but providing clear and comprehensive financial information will absolutely increase your chances of getting a loan approval.
To learn how to maximize your company’s lending potential, check out this article.
Create a Strong Business Plan
Every banker needs to prepare a loan application to present for approval. Creating a business plan for the banker will speed up your loan process, but most importantly, it allows you to pitch your company in your own words.
A business plan provides a description of the company, the products sold, target market, sales strategy, operations plan, financial review, and risk management plans. There’s a lot to cover within a business plan so stay tuned for next weeks’ newsletter where I will break down each section in detail.
Building Relationships with Banks
The first place to build a relationship to talk to the bankers where you already do your banking. If you don’t know any bankers, talk to other people you trust (i.e. other business owners, accountants, lawyers).
As with all relationships, a positive one takes time to build. If you are going to request for a loan without first building a relationship, the process will become very transactional. That’s not what you should be looking for.
A strong relationship goes a long way in the banking industry. Bankers are the gatekeeper to the bank’s resources (aka money). Having a strong, experienced banker makes it easier to get what you need.
Getting Your Loan Application Ready
After 4 or 5 meetings and doing the tango with the banker, it’s time to get the loan application submitted.
After the banker reviews all the financial documents and the business plan, there will ALWAYS be more questions. Don’t feel offended by the questions - be open and honest. The banker is only doing the necessary due diligence to get you the loan you need.
The Term Sheet
Once the banker has completed their due diligence, they will prepare a term sheet. A term sheet is a nonbinding agreement that outlines the basic terms and conditions of the loan.
Check if the terms outlined within will actually work for your company. If you don't know how to, read this.
Once you’ve digested the term sheet, address any concerns and negotiate for terms and conditions that align with your business objectives and financial capabilities.
If all the requirements checks off, sign off on the term sheet.
Loan Approval
The next step is the most painful part of the entire loan process - you wait.
It can take anywhere from 3 days to 2 weeks to get a response back from the bank.
If there are any further questions following the adjudicator’s review, be sure to address them promptly, thoroughly, and professionally.
Once the loan is approved, congratulations, but the job’s not finished.
Reviewing the Credit Agreement
It may be exciting to know the loan is approved, but reviewing a 20+ page legal agreement can be daunting. For larger, more complex deals, the credit agreement can be 100-250 pages long.
Take the time to read through the credit agreement carefully, paying close attention to all the terms and conditions. Make sure you fully understand the terms outlined in the agreement before proceeding.
Whenever there is something that is unclear or confusing, don’t hesitate to ask for clarification.
Be sure to compare the credit agreement with the term sheet to check if the approved terms align with your understanding based on the term sheet. At this stage, there should be no surprises.
The best advice now is to look for a lawyer who will represent you to review the credit agreement and complete the next steps.
Legal Due Diligence
Once the credit agreement is signed, the end of the loan process is in sight.
It's time to complete the necessary legal due diligence to finalize the loan for funding. Hiring a lawyer will ensure that all legal requirements are met and that the loan transaction proceeds smoothly.
Your representing lawyer will help you review the credit agreement, conduct title searches, draft legal documents, provide legal opinions, and help facilitate loan funding. The key takeaway here is to know that your lawyer should be protecting your interests based on the requirements of the bank.
If the loan is small (less than $500k), this step can be avoided but you will have to resort to signing standard bank agreements. If so, take extra precaution to read all the fine print.
Conditions Precedent
Before the bank disburses the loan funds, there will be conditions precedent that must be fulfilled. Conditions precedent are set to ensure that all business, legal, and regulatory requirements are met before the deal closes.
For example, if you are buying a property, the bank will need to ensure that a signed purchase agreement is in place, land titles have transferred, mortgage charges are registered, property taxes are current, and etc.
Conditions precedent are usually covered under the legal due diligence process, but in any event, you should understand all the conditions to have the loan advanced.
Funding Time
All of the legal requirements and conditions precedent have been met. It’s time to fund!
Funding means the money or limits are advanced.
For asset purchases where the funds need to be paid to the seller, it is typical for the funds to be sent from the bank directly to the lawyer’s trust account, then to the beneficiary's account to complete the transaction. In this scenario, the money never touches your bank account.
For line of credits, this simply creates an limit within the bank's system granting you access to the limit. Now, you can to tap into additional funds.
Conclusion
Securing a business loan from the bank (or any type of lender) can be a long process and is a significant milestone in your journey as a business owner. In this guide, I've covered the essential steps and considerations involved in the loan application process, from assessing your financial needs to funding the loan.
If you have any questions along the way, be sure to reach out and let me know anytime at hello@lawrencefan.com. I’m always happy to help.
That’s a wrap for this week.
Cheers!
That's it for this week. Thank you for reading Financing Journey. See you next Saturday.
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