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Tips for Business Borrowers: Preparing for the Lender

In any borrower/lender relationship, it is essential that the borrower provide an understanding of the business through an up-to-date set of financial and production records. Financial statements should include a balance sheet, an income statement, a statement of owner equity, and historical and projected cash flows. If possible, the borrower should provide three to five years of data. The lender generally requires the following financial data and supporting information; however, when approaching a lender, the borrower should ask specifically which types of financial information to provide.

  • A current balance sheet with supporting schedules and inventories (essential).
  • A record of earnings for three years.
  • A projected cash flow; if a major change in the business is anticipated, a transitional and normal operating year projected cash flow may be required, with sensitivity analysis concerning price, cost, and capital acquisition investments.
  • A good set of records showing production plans, short- and long-range goals, and procedures for implementation and evaluation.
  • Information concerning personal debt, including credit cards.
  • Information concerning the amount and stability of outside-of-business income.

Lenders don't like surprises. Just as you, the borrower, have a "wish list" of traits that a good lender should have, lenders also have certain expectations of a desirable borrower. Here are four key things you can do to help build your relationship with your banker.

  • Arrange credit in advance. Don't inform your lender of a major decision "after the fact." This destroys trust and credibility and makes future credit more difficult or even impossible to obtain.
  • Allow your lender time to review plans and make suggestions. Many major purchase decisions are made on the basis of emotion. A lender can be a source of sound advice and counsel in reviewing your credit request. Remember: an explanation of goals and plans builds confidence and trust. It also strengthens the working relationship.
  • Inform your lender of problems and changes. Even the best businesses are faced with adversities that reduce their ability to repay. Inform your lender of changes in plans or unforeseen problems that will interfere with making loan payments. Remember: communication is important not only in the initial request but throughout the whole credit process.
  • Maintain a high level of integrity. If the borrower expects a lender to be honest and above-board at all times, then the lender is entitled to the same attribute from the borrower. Inaccurate information and failure to honor commitments will jeopardize the borrower-lender relationship and could do harm that will last a lifetime.

Questions Borrowers Should Ask Themselves Before Approaching a Lender

What should you as a borrower do to be prepared in approaching a lender? If you can respond to the 12 questions listed below and provide support for your answers, you will have gone a long way toward being adequately prepared.

  • How much money are you going to need?
  • What is the money going to be used for?
  • How will the loan affect your financial position?
  • How will you secure the loan?
  • How will you repay the loan?
  • When will the money be needed and when will be it repaid?
  • Are your projections reasonable and supported by documented historical information?
  • How will alternative possible outcomes affect your repayment ability?
  • How will you repay the loan if the first repayment plan fails?
  • How much can you afford to lose and still maintain a viable operation?
  • What risk management measures have been or are to be implemented?
  • What have been the trends in the business's key financial position and performance indicators?


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