How to guarantee success on your business loan application

If you are the owner of a small business, or are in the process of setting up a small business, then chances are you will at some point need finance for your business. In the past this was a simple process as banks and other financial institutions were very keen to help businesses out. In the current economic malaise however, things are just a bit trickier. 

Although the government is putting pressure on banks to lend money to small businesses, because they are considered to be the ‘drivers’ of the economy, some of them are still not lending as freely as they should be. That’s not to say there aren’t loans out there, just that you will need to work a bit harder. 

Whether you take advantage of loans from the government or from a financial institution you should be able to find something. Indeed there are loans for every type of applicant, from loans geared to women, to loans for people with bad credit to loans for veterans. Spending some time looking online is a good way to track down loans specific to your criteria.

Once you have a broad idea of where to look you will then need to consider the factors the loan companies will use when assessing your application. These range from your credit history (or the credit history of the business) to your experience in business (and education) and the business plan you have put together:

Perfecting your business plan – This is the most important part of your application so you need to make sure it is word perfect and that all the numbers add up. In your business plan you need to set out your short, medium and long term aims for the business as well as providing realistic projections of turnover and income for the next three years. You should include a worst case scenario to show you have weighed up all the risks and you should outline how much money you will be needing to borrow, where it will be spent and how you will be repaying it.

Picking the right lender – Once the business plan is written you need to select the lender you want to borrow from. There are a number of government loans and grants around at the moment (normally with excellent interest rates) so look through these first to see if you might qualify. Alternatively, compare the business loans on offer from the banks and find one that looks like it will fit your needs. Most importantly, shop around for the lowest interest rates and fees.

Picking the right loan – Next you need to make certain you get the correct loan for your needs. There are all kinds of different loans available to small businesses, from secured loans to expenditure loans to joint venture loans. Make sure you understand how each of them works and what they would mean for your business. If in any doubt, speak to a small business advisor.

Consult the small business administration – If you are looking for small business advice on any step of the loan process, get in touch with the Small Business Administration and they will offer you free and impartial advice.

Esther is a freelance blogger and writer who covers everything to do with starting a business and becoming an entrepreneur. She blogs about everything from business plans to setting up websites, staff costs to accounts receivable financing.

Benefits of Listing a Company on the Stock Exchange

Image attribution: Freedigitalphotos.net; standard royalty free license

 Registering a business to be listed on a stock exchange does not necessarily require the business to be a huge billion dollar equity company. This is so as laws that enable smaller businesses to offer stocks on secondary exchanges such as the Chicago Stock Exchange or Arca Exchange allow those companies to remain private. 

Smaller public companies that wish to be listed on a stock exchange but do not meet larger exchange requirements may also have the option of listing on regional exchanges. If a company is private, the small corporate offering registration (SCOR) requirements within U.S. States is a specific form of stock offering that facilitates remaining a private company while still being able to gain access to stock exchange listing. The listing requirements and benefits vary form exchange to exchange, however finding and registering for an appropriate exchange may be well worth the cost for a number of reasons outlined in this article.

Listing requirements

Each stock exchange has different listing requirements such as historical earnings bars, share volume and stock capitalization value. These requirements may be determined by a Board of Directors and/or Executive group. Generally, the larger the exchange, the higher such bars are set but this does not necessarily exclude smaller businesses from being listed on an exchange. Rather, it determines which exchanges smaller businesses may have the opportunity to become listed on.

To illustrate, the Nasdaq stock exchange requires a minimum earnings of $11 million over three consecutive years prior to listing in addition to a minimum of one and a quarter million share float. By contrast, the Chicago Stock exchange has a tiered structure of requirements defined in part by business asset value. For example, a business with $4 million in assets must have net income of at least $400,000 in the last two years and share capitalization of $300 million for 500,000 shares with a minimum of 800 shareholders or 1 million shares with a minimum of 400 shareholders.

Benefits of listing on a stock exchange

Being listed on a stock exchange has many advantages that a business owner of any size might consider as part of a businesses strategic plan. Moreover, when expansion and leveraging are on the business agenda, stock exchange listing can cast a wider net into the capitalization pool i.e. the potential sources of equity funding. A few of the benefits of stock exchange listing are illustrated below.

• Market exposure

Through listing on a stock exchange a company is gaining market exposure to a broader membership of the financial community including market makers, buyers, sellers, and institutional traders, mutual funds and possibly hedge funds. Consequently, if a business is worth investing in, the listing opportunity has the potential to greatly increase capital investments. In other words, as opposed to private negotiations and networking, a listing on an exchange facilitates exposure to a larger financial market and wider range of investors.

• Advertising via market listings

Another benefit of listing a business on a stock exchange is the complimentary advertising that is included in the filing fee and registration. While this advertising may not be direct, the listing of a business on the exchange affords a business advertising through association. In other words being associated with the exchange and listed on it, a business is in effect advertising itself indirectly if not directly. What's more the cost of registration may be a good bargain because not only does it provide market exposure and advertising but the opportunity to generate capital investment.

• Improved brand equity through listing

Being listed on a stock exchange means that a business has met qualification standards set by the exchange. This can add credibility to a business and therefore brad equity, i.e. customer and/or client perception of value in a company and/or its products. Furthermore, in addition to the credibility resulting from the indirect endorsement from the listing, financial information and investor public relations may also be enhanced through contact information made available through the exchange listing.

• Potential for increased capitalization

A need for capital investment should be one of the main reasons a company lists on a stock exchange. Otherwise it might not be worth the time to be listed for the sake of advertising alone. Stock market listing is one of several sources of capital leveraging, but also happens to be one of the widest and most accessible forms of investment for both investors and businesses. It is largely in effect, a free market for buyers and sellers to meet, assess and trade capital for ownership and vice versa.

• Lower reliance on venture capital firms and debt financing

The potential for increased capitalization through wider market exposure may also reduce the need and reliance upon alternative sources of funding such as venture capital firms. This lower reliance for alternative sources of financing may improve negotiating leverage when obtaining financing from venture capital firms whether it be through less liability protection as determined by the stock ownership terms or lower cost of capital. In other words, if the market exposure gained through listing is positive, the effects on financing can also be positive.

To summarize, listing a business on a stock exchange may be a good idea for a business seeking improved market awareness, greater potential for capital investment, enhancements to brand equity and negotiating influence etc. Listing on an exchange should probably be in line with or in accordance with business strategy, otherwise the listing may be premature or unnecessary. Nevertheless, for companies that do seek stock exchange listing, the opportunity is there through multiple regional and national stock exchanges and different choices regarding business status and registration requirements with the Securities and Exchange Commission.

Sources:

1. http://www.chx.com/content/Trading_Information/Listing_standards.html
2. http://www.nasdaq.com/about/listing_information.stm
3. http://www.cftech.com/BrainBank/FINANCE/USStockExchs.html
4. http://en.wikipedia.org/wiki/Stock_exchange

How Banks Analyze A Company For Loans

Since banks' profitability is partly determined on how well they analyze corporate loan applications, the company loan application is quite relevant in banking risk management. To help the bank determine company viability and capacity to repay a loan, many financial, operational, market and economic factors are weighed into the loan application and company analysis. 

This article will discuss these factors. Section I will discuss the relevance of bank policy and loan criteria. Section II will go into greater detail about the specific items banks look at in analyzing and assessing corporate viability. Lastly, section III will discuss the analytical tools used by banks in evaluating company performance and qualification.

Bank policy and loan criteria

Bank policy is the framework within which loan applications are considered. The first step in a company loan application is compliance with the banks policy. Otherwise could immediately disqualify a company from qualifying for a loan and bypass the company analysis altogether. An example of bank policy in regard to company loan applications are the type of companies and company loans the bank provide. Moreover, some banks specialize in specific types of business loans only, making loan applications outside this criteria invalid. Moreover, the bank policy may also outline different analytical criteria dependant on the types of loan.

The bank officials' skill and carrying out of bank policy is also important in the loan application process. Loan officers often follow pre-determined criteria for approving loans and understanding these criteria is helpful if not essential in understanding how banks analyze company loan applications. Thus, the loan criteria are the broad requirements that a loan application must comply with to be considered further. The steps of loan analysis can vary but generally follow specific instructions and criterion.

Company performance factors

Financial strength from revenue, cash-flow and project management, streamlined operations, competitive positioning, financial ratios and corporate valuation are just a few of the items a bank may look at when considering a company loan. Other factors include the size of the loan, existing debt, credit history, loan use, business plan, application quality and applicant presentation. These are a lot of things for a busy business manager to consider in order to obtain bank financing, but it is in a nutshell, how banks manage their loan risk. Examples of a few of the specific qualifiers a bank may measure are below:

•  Company ability to provide all required documentation

• Debt level below a percentage of total average annual income

• Debt level below a percentage of company asset value

• Potential and probability of loan to facilitate profitability

• Credit history, and credit score

• Banking history and assets held within the bank

• Proven company compliance with government tax code

• Compliance with loan terms and agreements

The bank itself is yet another factor in how a company is analyzed for loans. This is so as different banks may have varying loan requirements, expectations, risk structure, bank policy, financial environment, economic forecasts, liquidity etc. These underlying factors are likely to influence how a bank analyzes a loan application in the sense that it predisposes the bank to either be stricter or more lenient on some aspects of loan applications.

Analytical tools used by banks

Without analytical tools a bank official would have little means by which to determine if a company's loan application meets company performance factors as required by bank policy. Several analytical methods and tools are listed below as sourced both independently and from http://commericalloananalysis.com . These tools are used by banks and taught to bank officials so they are better able to accurately determine the viability of a company in its ability to repay a bank loan.

• Ratio analysis

• Cash-Flow analysis

• Operational risk assessment

• Bookkeeping evaluation

• Breakeven analysis

• Forecast and probability measurement

• Multivariate analysis

Each of the above analytical tools is designed to measure different aspects of a business' performance. Since no one metric is able to provide a complete picture of a company's valuation, ability to repay, credibility, profitability etc. multiple analytical tools must be used. 

Definitions of each of these analytical metrics can be found by performing a keyword search for each term. For example, to learn more about the different types of ratios used in banking analysis of company loans, the keyword ratio analysis can be typed into a search engine search bar. Additionally, calling a bank's loan department and asking if they can provide information on loan assessment criteria can help a company better prepare for and meet the loan application criteria.