Whether you are an entrepreneur looking to start your own business or a business owner looking for additional capital, you may be considering applying for a business loan to finance your endeavor. As the Technical Specialist for the Cayuga Economic Development Agency (CEDA), I underwrite business loan applications for the City & County Small Business Loan Programs. Often, the loan applications that come across my desk are for businesses that have been working with our team here at CEDA for their strategizing and financing needs. For businesses who may be considering making the leap, but aren’t quite sure how to get started with a business loan, here are some guidelines for creating a strong loan application from an underwriter’s perspective.
Understand what borrowing options are available. There are many different types of loans available to small businesses, and one of the considerations I make is if the amount and type of financing being requested is the best option for the business’s situation. Not all loans are created equal, and some may be better suited than others depending on the business’s situation. For instance, if a business is seasonal and needs additional cash during the off season, perhaps a business line of credit (LOC) would be a more suitable option than a term loan. If a business needs to finance new equipment, a short-term loan would make more sense than a longer term loan. You don’t want the term of the loan to be longer than the working life of the equipment.
Have an up-to-date Business Plan. An informative and well-researched business plan is crucial for any business, regardless if the business is a start-up or already established. As an underwriter, I pay particular attention to a few main sections of the business plan: the executive summary, business goals, market analysis, and financial projections. The executive summary provides an overall vision of what the business is and the goals give me an idea of where the business wants to go. A thorough market analysis is essential for estimating future sales and will help to support the business’s financial projections.
Have the financials prepared. For a start-up business, the financials will primarily be estimates, or “projections” of future sales and revenues since the business will have no operating history. This is where the market analysis will help to support estimated sales and growth in future years. For an existing business, historical financial statements as well as market analysis will be the sources that support the business’s expected sales and revenues for future years.
Explain the sources and uses, including loan funds. The process of preparing a business plan and financials should help clarify how much financing a business actually needs to meet its goals, where all of the funding will come from, and how the money will be spent. Explaining the sources and uses of funding for the project at hand is like a roadmap of the costs involved. The loan you are applying for is usually only one component of funding for the project. Other financing, equity, or investments should be outlined as well, along with how each source of funding will be utilized. It’s important to do the research and get quotes when appropriate. In an underwriting perspective, we want to see that the business has researched all of the costs involved and outlined where the money is going.
Identify the equity and collateral. As with most financing, we will want to see an equity contribution to the business. This shows a level of commitment by the business owner to coincide with the lender’s portion of financing. Most financing will also require collateral as security for the loan. Collateral can be business assets or personal assets, and a personal guarantee is generally required in addition to the collateral.
Know where to find assistance. Whether you have a start-up or an existing business, there are many sources of assistance available to business owners that help with a variety of business needs. A good place to start is to meet with our team at the Cayuga Economic Development Agency for a free and confidential one-on-one session to help shape your business ideas into a strategic plan.