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Business Borrowing 101 ... from your banker's point of view - Part 2: The Requirements

by Mr. Mike Sanders

 

Part 1 | Part 2 | Part 3 | Part 4

This article is a 4-part series. Click PART ONE to go back and read prior part.

 

From your point of view, the borrowings to support the equipment purchase and additions to staff are a "no brainer". Your products have always commanded a 33% net profit margin and the putters are expected to do even better. The new equipment should have an economic life of 10-12 years and will be much more efficient allowing you to increase volumes with the same number of employees. The new guys making the putters will add incremental revenues above their costs immediately. You can use the same type of raw materials for both clubs and putters. Your existing lines of distribution will handle your putters and predict success in their sales. You would like to get the loan proceeds as quickly to possible to implement your plan.

The Loan Request

Although very polite, your banker does not seem to share your enthusiasm for the project. He explains that even though the bank does make these types of loans, he will need a formal "packet" of information from you in support of your loan request.

The packet is to include:

He wants to know what will be pledged as collateral and who will be willing to become liable on the loan as a maker/co-maker or guarantor. He also wants financial data to include projections of your business results with the new program in place plus current and historical financial statements on the business.

The packet should also include three years worth of business tax returns. For all individuals that will be liable on the note, the bank will need a current personal financial statement and three years of tax returns.

Loan Underwriting

Your banker explains that this information will be analyzed by the bank in its underwriting process to determine if the loan meets the banks risk and return guidelines. He further explains that the bank's acts in a fiduciary capacity to prudently "invest" the depositors' funds in loans that will earn enough income to pay interest on the deposits and give the bank a return as well.

When you left the bank, your head was spinning at the complexity of just borrowing some money. You were sure you could pay back the loan. After all, the loan was going to enable you to generate tremendous revenues at the company. So why isn't the banker as excited as you are?

Visiting with your Dad about the situation did not give you the answers you needed, as he had limited experience in borrowing money. But old Dad suggests that you call a former college classmate of yours (who is a commercial loan officer with an out of state bank) to seek his guidance. That seemed like pretty sensible advice. So, you picked up the phone and gave John a call.

Part 1 | Part 2 | Part 3 | Part 4

Please select PART THREE to continue with our unfolding story and training for Business Borrowing 101 ... From Your Banker' Point of View.

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About the author

Mr. Mike Sanders

Mr. Mike Sanders (USA)

Mr. Mike Sanders holds a BBA in Finance and an MBA. He is a licensed real estate broker and a 35+ year career banker.

 

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