Financing Your Business with the Credit Union
by Thomas Smith
Borrowing money for a business start-up, refinance or expansion is very important to any business. With proper planning this process can be easier than you may expect. Know your business, be prepared and willing to discuss all facets of your business and provide valuable information to the lender. The Credit Union generates income by lending money to members, but also has to protect the memberships’ deposits by assessing loan risk and making well thought-out loan decisions. It should be your objective to present the information in a professional manner and convince the lender that you are a reasonable credit risk.
Sources of Financing
The most common way to borrow money for your business is through your Credit Union. Before applying for a business loan investigate other sources for financing. This can include your own personal savings or borrowing against personal assets. Many new businesses have been started with home equity loans. Borrowing money from relatives and friends may also be an option at lower interest rates, benefiting your business.
When meeting with the lender it is very important that you are prepared to discuss your loan request and details about your business. A written loan proposal is suggested to present to the lender. This proposal should include the following:
Introduction: A description of the business, location, age and history of the business, principals involved and their ownership percentage, legal status of the entity, # of employees and tax identification number. State the amount of your loan request and the reason for the request.
Management: A resume’ showing experience, education and skills of the principals.
Products and Services: List the products and services that you offer and how you differentiate them in your industry and market. Include any information about products and services that you may be developing. How do you plan to market those products and services?
Financial Statements: For an existing business provide 3-years tax returns and/or accountant prepared income statements and balance sheets along with an interim financial statement for the current year. A new business should provide at least a 2-year projected income statement and balance sheet. Provide a personal financial statement and tax returns on each principal of the business.
Collateral: Provide a list of assets that the business has to pledge as collateral. This can include a depreciation schedule, inventory listing and accounts receivable aging. Collateral is typically discounted by lenders in order to conservatively consider the market value or liquidation value. Depending on the type of loan request and the information provided, the lender may require additional information.
Every business needs to work closely with an Attorney and a Certified Public Accountant (CPA). An Attorney can assist in setting up your new business entity, provide consultation on any legal issues while you are in business and help with any tax planning or ownership succession. A CPA will assist in providing accurate financial information, projections, tax reporting or planning for your business. There are also local Business Development Centers that can assist in writing business plans and loan proposals.
How does the Credit Union make its decisions?
The Credit Union has its own policies and federal regulations that it must abide by in making a credit decision. The five C’s of Credit are the primary factors in making a loan decision.
Cash Flow: The primary factor in a loan decision is the borrower’s ability to repay the debt. The Credit Union will review the projections or historical financial information to determine your company’s ability to repay the debt. Your Cash Flow must exceed your debt service.
Collateral: The assets that your business owns or purchases will be pledged to the Credit Union to secure the loan(s) requested. The Credit Union will discount the value of those assets according to their policies. If there is not adequate collateral coverage, the Credit Union may require additional collateral such as personal assets.
Character: Does your business pay its bills in a timely manner? A personal credit bureau will also be ordered on the principals of the business to determine their debt repayment history. At time of application let the Credit Union know of any credit history problems and explain those problems.
Capitalization:Your company’s balance sheet will be reviewed for sufficient capital. This includes retained earnings and your company’s net worth. Your company’s total assets should exceed total liabilities.
Conditions: What external factors affect your business? Industry conditions, economic trends and competition may affect the success of your business. Explain these factors with the lender. Be prepared to discuss the management structure of your business. This is valuable information in determining succession management and the future of your business.
There is a great deal involved in applying for a business loan. Talk with the lender throughout the process to make sure they have the information they need. Use the lender or an accountant as a counselor in determining proper loan structure and realistic assumptions in the projection process. Be confident in presenting the loan proposal. Remember, you want to convince the Credit Union that you and your business are a reasonable credit risk.