Minority Perspective
Vernon Hilton
Providing the financials banks want from you
Getting a business loan not quite as mysterious as some entrepreneurs think.
The number of entrepreneurs and small businesses is steadily rising. The reason behind this increase differs for every individual who chooses this path -- ranging from having an independent will to fear of job security. Regardless of the reason, in order to get started as an entrepreneur or small business owner, you need three things; a concept, a plan and funding. The concept and plan are for you to develop. Often the rough part is getting others to finance your concept.
The four most common funding sources for entrepreneurs and small businesses are personal savings, friends and family, angel investors and banks. The first three, if available, usually do not provide adequate funding, so that leaves many to depend on bank financing.
Proving Potential with the Proper Paperwork
When turning to banks for financing, it helps to know what to expect. Unlike the first three financing options, banks are not deeply interested in a borrower's passion or catchy slogans. Banks want results. They want to see evidence of good planning and past history.
The best way to provide this evidence is through solid personal and business financial statements.
The bank often determines an individual's financial strength from the information obtained in three documents; personal financial statements, tax returns and credit reports. Tax returns help the bank gain insight into a borrower's financial history, with three years of returns often required. Personal financial statements allow the bank to see an individual's current financial position based on his or her net worth. Last but not least is the credit score. A credit score in the upper 600s or above shows that a borrower has demonstrated good debt repayment in the past.
Providing Financials Helps Banks in Determining Business' Strength
Banks often determine a business' financial strength based on information provided in accountant-prepared financial statements, industry averages and Paydex scores. When banks make loans to businesses, they like to see between three to five years of financial history, which helps provide an understanding of the borrower's operational tendencies.
Once this is obtained, the next step is to compare the results of the borrowing company to similar companies in the same industry. Finally the business' credit quality is determined based on a Paydex score. The maximum Paydex score is 80, which means the company generally repays its suppliers within terms. As would be expected in today's current economic conditions, banks are paying attention to credit worthiness. Underwriting and credit requirements are in place to protect the banks and also the borrowers.
If you have done your homework and have a well thought out concept, strategic plan and the above-mentioned financials in place, then you are well prepared to find a lender to help finance your business.
Vernon Hilton is a commercial credit analyst at AMCORE Bank.
The views expressed are those of Hilton's and do not necessarily reflect those of the Rockford Chamber of Commerce.
