The Credit Application Process

The Credit Application Process


Applying for commercial credit can be tedious. It calls for
more documentation than you might initially have expected and
certainly a lot more than when you apply for consumer credit.
For lenders, extending credit to an entrepreneur usually means
customizing the loan to suit the credit needs of that business.
So don't be disheartened by the amount of paperwork needed to
accompany the application. Instead, be prepared!

Among the best assets you can bring to the lender is a
well thought-out and documented business proposal. You need to
clearly state the purpose of the loan (will the money be used
for temporary working capital, buying equipment, or expanding
facilities); the amount of funds needed and for how long; and a
repayment schedule. Your business proposal should include the
following information:

* business description that tells the nature of the
business, describes the product and its market, identifies
its customers and competition.

* personal profile that outlines the background and
experience of each of the principals in a resume.

* proposal that states the type of loan requested and its
purpose.

* business plan that outlines your corporate strategy. for
the next three to five years; it will aid you and the
lender in determining whether the business will generate
the cash flow needed to repay the loan.

* repayment plan that tells how you propose to repay the
loan or outlines a repayment schedule. The lender will be
expecting you to repay the borrowed funds from the profits
produced by the business. As a contingency, you might need
to develop a plan on how you would repay the loan if the
profits alone turned out to be inadequate.

* supporting documentation will include copies of pertinent
papers that support the information contained in your loan
proposal--for example, a lease, certificate of
incorporation, partnership agreement, letters of reference,
contracts, invoices or vendor quotes.

* collateral that you will use to secure the payment of the
loan. Collateral can include business and personal assets
such as inventory, equipment, and accounts receivable or
real estate, stocks, bonds, and automobiles.

* financial statements, both personal and for the business.
The business financial statement should be provided for
the last three to five years of operation including a
year-to-date interim report. It should contain a balance
sheet showing business assets and liabilities, and a
profit-and-loss statement showing revenues and expenses.
The lender uses this information to calculate a
debt-to-worth ratio for the business. Be prepared to
provide copies of tax returns for the business for this
same period.

The personal financial statement should list your assets
and your liabilities. Identify the names in which title to
each asset is held and its fair market value. You should be
prepared to provide copies of your personal tax returns.
You may be asked for a list of credit references. Lenders
will check your personal as well as your business credit
rating.

Lenders will carefully examine your financial statements
and business projections. As a borrower, you must be fully
prepared to answer questions about them.

* personal guarantees of the owners or other principals
usually are required, even from an established business.
The lender also may request another party's guarantee such
as a cosigner or a surety, or may request a government
guarantee from the U.S. Small Business Administration or
other government agency.

In addition to the personal guarantee that you give,
under the Equal Credit Opportunity Act the lender is
allowed to require another person's guarantee should your
application fail to meet the lender's standards of
creditworthiness. If all or most of the assets listed on
your personal financial statement are owned jointly with
your spouse, or with someone else, the lender is likely to
require such a guarantee, But the lender may not require
that your spouse be the guarantor,

In the case of secured credit, the lender is allowed to
obtain a spouse's signature on certain documents when the
applicant offers, as security for the loan, property that
the two own jointly, In this case, the spouse or other
co-owner may be asked to sign documents--such as a
mortgage or other security agreement--that would be
necessary under applicable state law to make the property
available to satisfy the debt.