I had the opportunity to hear from Mark Vance, SVP of Carrollton Bank, on the review process for the commercial loan applications they receive. Here are the six key factors that Bankers review before approving a commercial loan. These factors are listed in the order of its significance.
The clean image of the founders/executives of the applicant company is a key factor in the approval process for a loan. If those executives are introduced to the bank through a strong referral, it will be a great advantage. If the referencing person is already a reputed customer of the Bank, it will have a huge influence on their final approval.
2. Credit Score
Banks look for an excellent credit score for the founders/executives of the company. If you have bad stories from the past, do not try to hide those facts. You can try to be frank and explain the specifics of those situations. Creditors always like to hear how an applicant braved the adverse circumstances in the past and became successful.
3. Cash Flow
A company’s cash flow is the net profit plus its non-cash expenses minus the depreciation and amortization. The creditors look for some minimal levels of cash flow as it can be used to pay back the loan. Also, other creditors and employees can be paid on time indicating the stability for the company.
There must be enough cash balance needed to handle the losses, if any, during the initial months.
5. Net Worth
The other income of the founders/executives is scrutinized at this stage to assess the loan-repayment capacity. The Bankers want to identify the other assets of the applicant/co-applicants so that it can be easily converted to cash if needed. These include real estate holdings, certificate of deposit, savings accounts, and stock portfolios that can be liquidated faster.
Banks may not approve the loan without any collateral. Usually the repayment of the loan can be done if the company has enough cash flow. Otherwise, it can be repaid using the available cash or by using the Net Worth items listed above.
All these six factors need not be absolutely perfect for an applicant even though a healthy mix will work out to be ideal. The applicant company should also produce a Business Plan that encompasses these six items. Business Plan should not be an optional document; instead it is a pre-requisite for the loan application. An easy-to-read, visually appealing Business Plan can be a deal-winner.