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Your Prescription for Growing Pains
Signs of economic recovery are everywhere. Corporate mergers, acquisitions and initial public offerings were up in 2010, and appear poised to rise again in 2011.*
Manufacturing grew last year at the fastest pace in seven years. The Conference Board's index of leading economic indicators rose 0.9% in February 2011 - as fast as the prior two months combined. And consumer confidence hit a three-year high in February.** Even the restaurant industry is poised for its first year-over-year increase in sales since 2007, according to a forecast by the National Restaurant Association.
"Admittedly, the recovery has been more slow and steady than fast and furious," says Donna Kidd, Assistant Vice President, Member Business Lending, Affinity Federal Credit Union. "But if your business endured the lean years thanks to new efficiencies, technological breakthroughs or improved systems, you could reap great rewards from the upswing. That is, if you have the capital to meet the demands."
Your Business Loan Checklist
Lenders need certain information to determine whether to loan money. "To speed up the process and illustrate that you are a worthy loan candidate, present your potential lender with everything necessary to get the ball rolling," Donna says.
- A business plan that explains why you need the money and how you will spend it.
- Cash flow projections to show that you can repay the loan.
- Business and personal financial statements, including assets and expenditures, as well as past business tax returns.
- Credit rating reports to help determine your purchasing and payment history.
- Repayment plan that explains how you will repay the loan.
Low-risk businesses, whose documents prove their ability to profit and repay funds, generally will receive a loan before a high-risk company. Applicants that appear to be a high risk may still qualify for a loan, but at a higher interest rate with stricter loan terms.
When you are ready to expand your space, hire more employees, upgrade your technology or reevaluate your existing financials, turn to a trusted resource for help.
Just What the Banker Ordered
Of course, passion and commitment are not nearly enough to secure a business loan in these times of tightened credit standards. "Before you approach a lender, it's important to understand how they evaluate potential customers so that you can position yourself in the best light possible," Donna advises.
The first thing a lender will review is your balance sheet. A business with a debt-to-equity ratio (sometimes called leverage ratio) between 1-to-2 and 1-to-1 is generally considered in good standing (however, different thresholds may apply in different industries). For example, if your business has $75,000 in total debt and $125,000 in total assets, your debt-to-equity should make the grade. Next in line of importance is to measure current assets against current liabilities, called a current ratio. A 2-to-1 ratio, where assets are twice the liabilities, is generally considered good, but a 1-to-1 ratio may be acceptable, too. Again, satisfactory ratios vary by industry.
"Lenders will also want to look at your balance sheet from either the previous quarter or for a full year," Donna explains. "They will compare your balance sheet with a comparable business of similar size to see how you measure up. Finally, cash flow, defined as net income plus depreciation, will be scrutinized."
Let Us Help
If you're ready to expand your business or refinance existing business loans, Affinity is ready to help you understand what you need to take the next steps. Contact an Affinity Business Specialist at 866.992.3360 or find out more about business loans. We can help you find one that meets your needs.
* Source: Grant Thornton International, www.gti.org.
** Source: The Conference Board Consumer Price Index®, Feb. 22, 2011, www.conference-board.org/data/consumerconfidence.cfm.
