Dealing with the Paperwork Involved in Obtaining a Loan

Each financial institution has its own requirements when it comes to documenting a loan request, but there is not a lot of difference between the requirements of one financial institution and those of any other. The type of information required will vary depending more on the nature of the request rather than the institution.

The documents below cover most of what you would be required to submit in order to obtain an operating or term loan. Occasionally, there are also requests for information that are specific to one's situation and can only be dealt with at the time.

Year-end financial statements

For many SMEs, financial statements are comprised of i) a balance sheet, ii) a statement of income and iii) a statement of retained earnings. (The larger SMEs would also likely have a sources and uses of funds statement). A financial insitution will generally like to see at least three years of financials, if you have them. This helps it to establish if you are profitable and what are the developing trends. Most SMEs would not have "audited" statements because the businesses of many SMEs are not large enough to warrant the expense of an audit. Chances are, if you have had your books prepared by an outside accountant, they would be on a "review engagement" basis, or an even less detailed "notice to reader" basis. Here, the professional accountant relies heavily on the information you provide, and the main purpose of having them undertake a review is to ensure that you conform to standard accounting and tax principles.

Interim financial statements

Financial institutions do not like to make lending decisions on the basis of "old" financial information ( "old" generally being defined as over six months) because a lot could happen to a company in the interim. Consequently, if your financial statements are older than six months, as part of its pre-conditions for a loan, the financial institution will also likely ask you to provide updated "in-house" interims, that is, financial stements that you prepare yourself. (You can have them prepared by your accountant if you so wish, but they do not have to be acknowledged by the accountant as having been prepared by her).

Quarterly or monthly statement of income

Once a financial institution has lent you the money, it will want to monitor your financial progress regularly, especially under a term loan where the facility is not repayable "on demand", but repayable based on a repayment schedule and based on the company meeting certain financial ratios. If you are going to borrow, organize yourself beforehand by establishing a relationship with a professional accountant and by keeping track of your income, at least on a quarterly basis. There are software programs available to help you do so.

Financial projections

The financial projections typically include a 1) cashflow statement, a 2) projected statement of income and a 3) projected balance sheet.

1. The cashflow statement is required to ensure that the revenues, combined with whatever funds the financial institution is prepared to lend you, are sufficient to meet your cash obligations. You will be expected to estimate when and how much money you will have coming in and going out for the next twelve months, and possibly also for the next two or three years if you are seeking a term loan. Your cashflow forecast will help you and the financial institution decide what you can afford, where you can afford it and whether your loan repayment proposal is realistic. Neglecting to follow your cashflow closely is practically a guarantee that your business will fail. Most businesses fail, not because they do not have enough in the way of sales and receivables, but because these receivables and other assets have not been properly managed to give the company the cash when needed to meet its obligations. Preparing a realistic cashflow forecast and using it as a guide will help you stay in control of your business. Your accountant can show you how to do a cashflow statement or you can pick up the forms at most of the larger financial insitutions.
2. The projected statement of income is required in order to get an estimate of the pre and post-tax income which would then be available for reinjection into the business. If you are seeking a term loan, you would probably have to submit projections for at least three years. Having three or more years of projections will provide an indication of anticipated trends and relative relationships between various expense and revenue items.
3. The projected balance sheet is required to permit the financial institution to (hopefully) see a build-up in the net worth (assets minus liabilities) of the company over time. The numbers in the projected balance sheets are also used to set financial covenants when you first agree with a financial institution on the terms and conditions of the loan. Usually these financial covenants apply to term loans but there are cases where a financial institution will also insist that these be in place under an operating loan. (Two examples of ratios are a working capital ratio and a debt/equity ratio). In part, it will use the projections to ensure that the ratios you agree to when signing the loan agreement are realistically achievable. You can not agree to ratios if you have not projected your position, and the financial institution will not agree to lend if it can not be satisfied that the company will be able to maintain what it considers to be adequate financial ratios.

Personal statement of affairs (your personal financial condition)

Depending on the legal structure and financial condition of your business, and the security that your company is able to offer to the financial institution in support of your loan request, it is likely that the financial institution you deal with will consider that the strength of the business depends at least in part, on the personal and financial resources of the owners. Consequently, it will need personal information to demonstrate the support the owners can bring to the business. Most institutions have their own standard forms which seek details about your assets, liabilities and income. This information is treated confidentially.

Tax returns

Where there is no clear differentiation between the company and the owner, or when the company's financial statements are not prepared by a public accounting firm, the financial institution may also request copies of federal income tax returns for the company and/or the owner to verify other financial information on hand. Again, this information is treated confidentially.

Business plan

A request for a new loan or for an increase may entail the provision of a business plan. The financial institution will ask to see evidence that you have a clear picture of your company's future. A detailed business plan may be a prerequisite. To learn more about strategic and business planning, you can refer to these modules elsewhere in "Steps to Competitiveness".

Current aged list of accounts receivable

The likely main component of the security you would provide to a financial institution under an operating loan would be the accounts receivable. Typically, a financial institution will provide loans equal to 75 % of the value of "good" accounts receivable, that is, receivables of less than 90 days. The institution monitors its loan against these receivables based on the monthly updated list you provide to it. If it does not get the information on time and according to its format, it will become concerned. Thus it is important to provide it as requested. Note here that it is possible to obtain credits insurance for both domestic and export receivables. Having this insurance could help you to borrow up to 90 % of the value of the receivables instead of the standard 75 %.

Asset evaluations

Where you are seeking funds against a fixed asset, if that asset is used, the financial insitution will generally ask for a current appraisal of the asset's value. Based on this evaluation, it would probably provide somewhere between 50 % and 75 % of the appraised value. You will have to get the appraisal if the amount of funds you are seeking warrants the cost of the appraisal (with the appraisal coming from an outside expert), because a financial institution is reluctant to advance funds based on historical values.

Legal documents ( articles of incorporation, borrowing by-laws, etc)

These will depend on your individual situation but should not be difficult to provide.