Preparing Loan Application

Obtaining a commercial loan requires a great deal of legwork and preparation. These are some key documents you should have ready to present to the lending institution:

• your company's financial statements including balance sheet, income statement, and tax returns

• your personal financial statements and tax returns for the past three years

• monthly cash flow projections based on obtaining the loan

• thorough and detailed business plan

• specific details of how the loan will be used

• management profile

The organization and timely preparation of these documents will be a reflection of your business, so pay close attention to the presentation.

Note that one of the most common reasons businesses get turned down for commercial loans is that their accounting is sloppy or deceptive. Reducing your reported income is one way to avoid taxes, but it can also make your business look like a horrible candidate for a loan. Make sure your financial documents are reviewed by a qualified accountant before you take them to lenders.

Are you classified as an undesirable loan?

Even before you complete an application, you may be fighting a losing battle: some types of businesses are deemed "undesirable" by lenders. Addressing this issue will require a great deal of tact, but finding out the answer can save a lot of time and energy for both you and the potential lending institution. You'll have to go directly to the lender and ask whether your industry is classified as an undesirable loan.

This list can vary from one institution to the next, and can be based on risk factors (industries in decline or subject to strict legal controls) or ethical concerns (adult businesses, firearms, or alcohol/tobacco.) If your industry is classified as undesirable, you're going to have a very difficult time obtaining a loan.

Commercial financing rates and costs

When shopping for commercial financing, avoid focusing too closely on costs. On a loan of tens or hundreds of thousands of dollars, a difference of $50 or $100 per month will have little impact on your business, so you should choose the lender that best matches your needs and seems the most trustworthy, instead of the lowest cost provider.

Business owners who aren't familiar with commercial financing tend to have unrealistic expectations when comparing interest rates, usually because they try to equate extremely low home mortgage rates to business loans. Banks are willing to offer 6% rates on home mortgages because the home itself will always be there and is almost guaranteed to go up in value, so their investment is fairly well guaranteed.

That's just not the case with businesses. Businesses can fall in value or even go bankrupt. To compensate for those additional risks, lenders have to charge more for business loans. Typical rates right now range from 8% to 14% - but you will always find higher and lower rates. In some cases, you won't even be quoted an exact interest rate. Instead, the lending company will simply tell you what your total monthly payments will be, including all fees and interest.

The most important step you can take when comparing one loan to another is to be sure you're comparing equivalent fees! When you get a quote, ask what your total monthly payments will be. Even if you are quoted interest rates, don't shop on those alone - some lenders will deliberately offer tempting low rates of 6% or 7%, then add steep fees to your monthly payments that bring your total back up.

In general, the best rates can be obtained from banks that know you, and the steepest will be from small lenders who focus on high-risk or startup businesses. Often you will be able to negotiate some of the fees involved in the loan, but the interest rate is usually determined by a specific formula the lender has in place, so you usually won't be able to get that moved.

Many businesses use credit cards to finance operations at first - when you consider that many carry monthly finance charges of 18% and can jump to 25% or more after one missed payment, you can see why commercial financing is a better source of emergency funds.

In most cases, you'll have to pay an application fee, which in some cases may be non-refundable. If you must pay a non-refundable fee, make sure it's fairly low - less than $100, for most loans. Read the contract carefully to make sure there are no other hidden fees you'll be responsible for.

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