Securing financing is a crucial step for many businesses, whether they’re looking to expand, invest in new equipment, or cover operational expenses. Commercial loans from banks are a popular option, but the process can be complex and intimidating. In this blog, we’ll demystify the credit process, giving you a clear understanding of what to expect when seeking a commercial loan from a bank.
Define Your Financing Needs
Before you dive into the credit process, it’s essential to determine exactly what you need the loan for and how much capital you require. You’ll need to specify the purpose, whether it’s for working capital, equipment purchase, real estate, or other business-related expenses. This step is crucial as it influences the type of loan you should apply for and the amount you’ll request. An informal conversation with your lender could help you with this process.
Gather Your Financial Information
Banks assess the creditworthiness of businesses before approving loans. To do this, you’ll need to provide a variety of financial documents, such as:
- Financial Statements: Provide recent statements such as a profit and loss statement, a balance sheet and current debt schedule. These documents help banks evaluate your financial health.
- Tax Returns: Provide your business and personal tax returns for the past few years.
- Personal Financial Statements: Banks will require a personal financial statement outlining information from the business owners or guarantors. Most banks will provide a blank form or you can find blank forms online.
- Business Plan: A business plan could be required, especially for new or changing businesses. A well-structured business plan outlines your goals, strategies, and how you intend to use the loan. It instills confidence in the bank regarding your ability to repay the debt.
- Collateral Documentation: If your loan requires collateral, you’ll need to provide information about the assets you’re willing to pledge such as real estate, equipment, inventory or accounts receivable.
Evaluate Your Credit History
Your personal and business credit history plays a significant role in the bank’s decision-making process. Obtain a copy of your credit reports and ensure there are no errors or negative items that need addressing. A strong credit history can improve your chances of approval and favorable loan terms.
Select the Right Loan Type
Banks offer various commercial loan types, such as term loans, lines of credit, SBA loans, and commercial real estate loans. Choose the one that best matches your business needs and financial situation. Different loan types have distinct terms, interest rates, and repayment structures.
Submit Your Loan Application
After completing the necessary preparations, you can formally apply for the loan. This process typically involves having a conversation with a lender and submitting all the required documents. Make sure to be as thorough and accurate as possible, as incomplete or inaccurate information can delay the process.
Underwriting and Evaluation
Once you’ve submitted your information, the bank’s underwriters will assess your creditworthiness. They will examine your financial documents, credit history, business plan, and other relevant information. The bank will also assess the potential risks and the ability of your business to repay the loan.
Loan Approval and Terms
If your request is preliminarily approved, the bank will provide a term sheet specifying the loan amount, interest rate, repayment terms, and any collateral requirements. Carefully review the terms and conditions, and don’t hesitate to negotiate if needed. The term sheet will also include a list of conditions for final approval. Items such as appraisals, sales agreements or other missing information would be included.
Final Approval Stage
After accepting the term sheet the bank will work on the final approval stage. The bank will gather the additional information requested in the term sheet. Be responsive as your lender reaches out for the missing items in order to keep the process moving. The lender will let you know when the loan is fully approved, pending documentation, and can issue a Commitment Letter if requested.
Closing and Funding
After the final approval you’ll move on to the closing and funding stage. At this point you may still need to provide items needed to support the documentation such as your business entity documents or updated personal ID. You will then be required to sign the necessary legal documents and the loan will be disbursed to be used for your intended business purposes.
As you start using the loan funds, remember to adhere to the agreed-upon repayment schedule. Timely payments will help maintain your credit and future lending options.
Seeking a commercial loan from a bank can be a pivotal step in your business’s growth and success. By understanding the credit process and being well-prepared, you can increase your chances of securing the financing you need. Remember that building a strong financial foundation, presenting a compelling business plan, and selecting the right loan type are key factors in achieving your goals.
Schedule a time to speak with a Penn Community Bank Business Banker to discuss your options by visiting https://www.penncommunitybank.com/contact/