The Credit Application Process
Commercial credit application can be tedious.
It calls for more documentation than you might initially have thought of,
and certainly much more than when you apply for your consumer credit.
For lenders, granting credit to an entrepreneur usually means
customizing the loan to meet the credit needs of this company.
So don't be discouraged by the amount of paperwork
required to accompany the application. Instead, be ready!
Among the best assets you can take to the lender
is a well conceived and documented business proposal.
You must clearly state the purpose of the loan
(will the loan be used for temporary working capital,
new equipment, or expansion of facilities),
the amount needed and for how long,
and a repayment schedule.
Your business plan should include the following information:
- company description, indicating the nature of the business,
describes its product and market,
identifies its customers and competitors.
- personal profile that describes the background and experience of each of the principals in a curriculum vitae.
- proposal that indicates the type of financing requested and its purpose.
- business plan that describes your business strategy for the next three to five years, it will help you and the lender to determine whether
the company will generate enough cash flow to repay the loan.
- repayment plan showing how you propose to repay the loan and outlines a repayment schedule. The lender will expect you to repay the lended money from the profits generated by your company. You might need to develop a plan on how you will repay the loan if the profits of the business alone proved inadequate to do so.
- supporting documentation includes copies of relevant documents concerning the information contained in your loan proposal, for example, lease, certificate of incorporation, partnership agreement, reference letters, contracts, invoices or vendor prices.
- collateral that you will use to secure the payment of the loan. Collateral can include business and personal assets such as inventory, equipment, and accounts receivable or real estate, stocks, bonds, and car
- financial statements, for both you and your company. The financial activity must be provided for the last three to five years of operation, including a year-to-date interim report. It must include a balance sheet of assets and liabilities, and profit and loss statement showing income and expenditure. The lender uses this information to calculate the ratio of debt-to-worth for the company. Be prepared to provide tax returns copies for the company for the same period.
The personal financial statement should list your assets and your debts. Identify the names in which the title of each asset is owned and its real market value. You must be ready to provide copies of your personal tax returns. You may be asked for a credit references list. Lenders will verify your personal and your business credit rating.
Lenders will carefully examine your financial statements and business projections. As a borrower, you must be totally ready to answer every questions about them.
- personal guarantees of the owners or managers are normally required, even for an established company. The lender may also asked another party's guarantee such as a cosigner or a surety, or may demand a guarantee from the U.S. Small Business Administration or other government agency.
On top of the personal guarantee that you give, according to the Equal Credit Opportunity Act, the lender is entitled to demand the guarantee of another person if your application does not meet the lender's standards of creditworthiness. If all or most of the assets listed on your personal statement are owned jointly with someone else, the lender will probably require such a guarantee. The lender can not require that your spouse be the guarantor.
In the case of secured credit, the lender can ask to obtain a spouse's or other co-owner's signature on certain documents when you offer, as collateral for the loan, assets that you own jointly. In this scenario, the spouse or other co-owner can be asked to sign documents such as a mortgage or other security agreement that would be necessary under applicable state law to make the assets available to satisfy the lender's standards of creditworthiness.
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