The strong economy of the last few years brought many benefits with it, including easier access to credit with lenders. With low interest rates and soft demand for loans, lenders focused on credit quality while streamlining the loan application process and relaxing documentation requirements. Those practices will now change in response to the economic uncertainties brought on by COVID-19 and the resulting multiple stimulus legislation. Only well-organized packages, and ones that effectively make the borrower’s case, will be considered. Certain key components that are present in the best loan proposals include:
- Loan Request and Use of Funds.
- Clear Description of Collateral.
- Business Plan.
- Financial Statements.
- Financial Projections.
Consider the following to strengthen your presentation in these areas.
Loan Request and Use of Funds
Summarize the information on one page showing the amount of financing requested, the security available, and the intended use of the debt. In the most specific terms possible, make your case for why you need the funds and how they will be used. Break down the request showing long-term debt based on terms and list lines of credit separately. The loan writing process is a data-driven exercise. The more supporting data you can provide, the higher your chances of success in the application process will be.
Description of Collateral
Provide detailed descriptions of collateral for the loan and summarize the estimated value of the collateral available to the lender. Loan to collateral value measurements are monitored closely by banks, and requirements will vary by lender. A general rule of thumb is:
- Accounts receivable –80% of eligible receivables (balances over 90-days old and related party receivables would be considered ineligible)
- Inventory – 50% to 75% (excluding work-in-process and slow-moving goods)
- Equipment – 50 to 75% of the appraised value
- Real estate – 75% to 80% of the appraised value
Make a plan to provide updated accounts receivable and inventory listings during the application process. While formal appraisals aren’t necessary for the proposal, your estimates should be conservative, so there are no surprises when the bank orders its own appraisals later in the process.
A well-written business plan could very well be the difference in your request being approved or denied. Your plan should thoroughly convey your vision and strategic advantages, and the discussion of your operations should show how your organization will accomplish its goals. It should also include in-depth analyses of your market and competitors. The Small Business Administration provides excellent resources for writing a business plan at sba.gov.
You should include annual financial statements for the past three years and interim financial statements that are no more than 90-days old. It would be best if you planned to provide more current interim financial statements prior to closing the loan. All guarantors should provide personal financial statements.
Companies that have undergone annual audits will benefit from the additional confidence that banks will have in their annual reports.
Projections that support the ability to repay the loans from future cash flows are critical. Collateral alone will not result in an approved loan. Successful loan proposals will contain financial projections that present adequate profitability and operating cash flow for debt repayment. Depending on your request, plan to present annual projections for five years and monthly projections for the first year.
While obtaining financing will likely be more challenging in a COVID-19 impacted economy, manufacturing and distribution companies presenting well-prepared loan proposals will have a better chance for success. Contact your local CRI advisor for guidance and check out CRI’s COVID-19 Resources Page for additional information.