THE ABC's OF GETTING A SMALL BUSINESS LOAN

By Chris Lehnes, Vice President, CIT Small Business Lending Corporation

Predicting the future is obviously risky. But given the current volatility and uncertainty of the marketplace, it would be very safe to predict that financial institutions will be extremely thorough in reviewing your small business loan application.

Consequently, be prepared to provide the prospective lender with financial information to evaluate your qualifications for funding. And the best way to prepare is to first look at the process from the lender's perspective.

Most financial institutions require three consecutive year-end tax returns, financial statements and interim reports. Occasionally, exceptions will be made for younger companies if they have a fair share of unencumbered assets and a quantifiable market.

You will also need the following documents:

1. balance sheet
   
2. profit and loss statement
   
3. accounts receivable and payable aging
   
4. debt schedule
   
5. management's discussion or analysis of operations
   
6. projections for the coming 12 months personal and business tax returns

All of this information will be reviewed by the lender to determine available cash flow, trends in assets, liabilities, working capital, total debt and net worth. The lender will also want to know if the statements have been prepared and audited by a certified public accountant.

The lender will review your company's cash flow, history of profitability and related factors, including:

1. How well has the business been managed in the past?
   
2. How does your business measure up to industry norms?
   
3. How well have you managed your assets?
   
4. What are the projections for the future?
   
5. Are there sufficient funds to cover future debt service or interest payments?

If your financing need is to start a new business or to expand existing operations, the lender will want to review your business plan.

Unused and available bank credit lines or other credit facilities are also factors in the loan approval process. They reveal whether there is a sufficient reserve to buffer minor cash flow problems. For example, a lender will question whether those resources are sufficient to address a seasonal need for extra funds.

Beyond the numbers, intangibles are important, too. For example:

1. How long has your senior management been involved in the industry?
2. How well do they appear to understand the industry?
3. How long have they been with the company?
4. What are their reputations?
5. How much equity do they have in the company?
6. If financial problems arise, does your senior management team have the experience to cope?

Such questions are asked because unlike the stock market, past performance is often a good indicator of management's ability.

Lenders will also consider facilities and equipment. Are they adequate? Are repairs and overhauls handled internally? To what extent will capital expenditures be necessary to upgrade existing facilities and equipment?

If you plan to use your loan to renovate an existing building, the lender will want to know that you understand the costs and benefits of the construction and can demonstrate the need for additional space.

The real key is to convince the lender that you understand every aspect of the project and are prepared to answer any questions. For example, if you want to buy the building you currently lease, you should know all of the costs associated with ownership - real estate taxes, utilities, repairs and maintenance - and how they may differ from the lease payment. If you are interested in purchasing an existing business, you should be able to show that you have done extensive due diligence -- looking at the customer base, current and prospective competition, and prospects for the next several years.

References are also extremely important. A good credit history with trade suppliers and personal accounts can carry a great deal of weight and make the difference between a "yes" or "no" from the lender.

But what are your options if the prospects for a positive lender's decision based strictly on the "financials" look shaky? When that happens, consider pledging additional collateral or a larger down payment.

Since the success of a small business is contingent upon the owner's skills and commitment, a small business owner will almost always be required to pledge his or her personal guaranty as well as any personal assets available as collateral. In fact, a business owner should be prepared to contribute personal funds to any project for which they are seeking financing. Most lenders will insist on splitting project costs with the business owner. For a real estate purchase, your share could range from 10 to 30 percent. A new business should be prepared to contribute at least one-third of the start-up costs.

Having the necessary information packaged and readily available demonstrates your command of the financial side of the business as well as a sensitivity to the lender's requirements and business style. Remember that an honest exchange of information allows both parties to structure the best possible "deal" for each other's needs.

Be prepared to get a "Yes" to your loan request. Make sure you have the following documents a financial institution will expect you to have.

1. Three consecutive year-end financial statements and interim reports
2. Balance sheet
3. Profit and loss statement
4. Accounts receivable and payable aging
5. Debt schedule
6. Management discussion and analysis of operations; projections for the coming 12 months
7. Personal and/or business tax returns
8. Business plan. (for new or expanded operations)
9. References
10. Information on unused or available credit lines and facilities

CIT Small Business Lending Corporation offers Small Business Administration loans for business acquisition, owner-occupied commercial real estate, franchise, construction and equipment financing. Its website and on-line loan application, EZApp, are located at http://www.smallbizlending.com/. It is the small business lending unit of CIT Group Inc.(NYSE: CIT), a leading, global source of financing and leasing capital, and an advisor for companies in a variety of diverse industries. Founded in 1908, CIT Group Inc. is managing more than $50 billion in assets across a diversified portfolio.

*Information courtesy of CIT Small Business Lending (www.smallbizlending.com)

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