Start-Up Venture

 

Venture Financing

Obtaining a Commercial Loan for Your Small Business

What Does the Bank Look for in Making a Decision: 12 Questions

By: Bob Fujii

Mr. Bob Fujii, formerly of Bank of Hawaii, and the National SBA Small Business Advocate of the Year offers these insights into what the bank looks for in a business in order to make the decision to grant a loan.

 

 

The Key Points

  1. What type of industry are you involved with?

  2. Is it new, emerging or growing?

  3. Is it dependent upon other industries?

  4. Factors that impact the business risk, such as management experience, depth and integrity. How long has the business been in existence? Also, include market share, size, product line (supply, sales, and distribution), and profile of customers.

  5. What is the legal form of the business? Is it a partnership, proprietorship, corporation (what type), joint venture, etc.?

  6. Quality of management. What type of experience does the management team have with this specific industry, and what is the commitment? Are the owners involved directly with the business or are they absentee owners? What assets or liabilities are involved with the business? How does management take out their salaries/bonuses?

  7. What facilities are used and where are they located? What are the terms of the lease? How does it compare to competitors' facilities? What are the capital expenditures, insurance coverage, etc.?

  8. Existing financing. Do you presently owe trade suppliers, other banks, principal shareholders, relatives, and others?

  9. Who are your sources of suppliers, including history and discounts?

  10. What are your existing loan arrangements, bank relationships, borrowing/repayment history, estate planning?

  11. Provide a financial analysis, which includes accounts receivable/payable, credit policy, collections/bad debt experiences, and conditions of inventory. Are your taxes current? How is the company capitalized compared with the industry? What are your marketing plans, sales projections?

  12. Also include balance sheets, income statements, expenses vs. sales, operating profit margin, asset management, liability management, cash flow summaries, and projections and sensitivity analysis.

The Two Most Important Questions

In your ability to answer the above questions, you help the bank answer the most important questions:

  1. What is the purpose of the loan?

  2. What are the sources of repayment and quality of those sources so that the bank can devise a program of repayment that makes sense to the small business owner?

 

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