Enterprise Bank & Trust

Business Loans: What Banks Look For

April 6, 2016

Banks that provide business loans look for specific characteristics. Are you eligible for a business loan? Use this helpful infographic to find out.

When you’re in the market for a business loan time is usually of the essence. Whether you’re in the market to expand or need a business loan to help pay expenses facts are facts: you need an injection of cash fast!

Business loans have requirements that extend beyond traditional consumer financing. When faced with the prospect of obtaining a business loan a bit of research can come in handy. What are the eligibility requirements that business bankers are looking for? What questions should you ask and what documents should you prepare?

The process can be daunting but it doesn’t have to be! With our helpful infographic you’ll be well on your way to finding the right financing that fits your business’s goals and objectives. Learn how about the important business loan eligibility requirements below.

Bankers vs. Entrepreneurs

Bankers are:

  • Risk avoiding

  • Pessimistic

  • Education: usually accounting/finance

  • Background: heavily regulated

Entrepreneurs are:

  • Risk seeking

  • Optimistic

  • Education: usually sales/production

  • Background: normally not heavily regulated

Questions For Your Bank

What is the bankers experience with my industry?

What is the upper limit of credit the bank extends to one borrower?

How are loan decisions made at your bank?

How does my loan amount compare with the average loan from the bank?

Is the bank growing loans?

What happens if I hit a bump in the road?

Will I get to know all of the decision makers at the bank?

What is the bank’s attitude toward risk?

Questions From Your Bank

What is the big picture of your business?

  • General industry designation

  • Operating base of company (i.e.: manufacturing, distribution, service)

  • General reputation of company and/or it’s owners

How are the financial decisions made?

  • CEO, COO, CFO, Controller

  • Advisory Board

  • Active or Passive shareholders

Who are the professional advisors?

  • Current bank provider

  • CPA/Account services

  • Attorney(s)

  • Financial advisors

  • Advisory board of directors

How do you manage the financial information?

  • Annual budgets

  • Monthly/quarterly statements

  • Annual tax returns

  • Compiled statements prepared by CPA

  • CPA reviewed financial statements

  • Audited financial statements

Describe the ownership structure of your business:

  • Limited Liability Company

  • S Corporation

  • Any related companies and/or subsidiaries

What are the internal financial management systems?

  • Sales pipeline/backlog reports

  • Production and administrative expenses

  • Accounts receivable management

  • Inventory management

  • Cash management system

The Big Three

How the bank evaluates your business

  1. Cash Flow: cash flow indicates financial health. Banks will review the following:
    1. Historial cash flow
    2. Cash flow from operations vs. extraordinary items
    3. Proforma cash flow
    4. Cash flow coverage
    5. Proposed debt service
  2. Collateral/guarantor support: collateral assets come in many forms. It's important to understand the following:
    1. Marketability
    2. Cash conversion cycle
    3. Discount to market
    4. Cost to convert
    5. Non cash carry cost
    6. Replacement cost
    7. Sales comparison
    8. Income approach
    9. "As is"
    10. "As completed"
  3. Critical ratios: ratio analysis helps identify and assess strengths and weaknesses and understand risk.
    1. Debt Coverage Ratio
      1. Net Income & Interest +
      2. Depreciation Expense +
      3. Cash Taxes =
      4. Annual Debt Service: Principal & Interest

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