Occasionally we feature guest posts at DoctorEquity. Derek Simonsen is my business banker. For the past five years we have been working together to fund great deals. We work well together now, but when I was first starting out I would have loved to read a blog post on what bankers need in order to evaluate my wonderful deals.
What to Bring to Your Banker
By Derek Simonsen
When applying for a commercial loan the bank will require certain information. The required information is the same for the most part, whether it is a commercial loan to start or purchase a business, for equipment/asset purchases, or commercial real estate. Depending which type of commercial loan you decide to pursue, the list of information required my change. Be aware that different lenders may ask for different documentation and the inconsistency can be frustrating which makes it difficult to accurately compare your options.
All in all it is a fairly straight-forward process to apply and it all starts with the last 3 years of tax returns. Lender’s like to see not only personal returns, but any other tax returns you have for other business endeavors you may be involved in. That will help the lender put together the full picture of what is going on. With those tax returns the lender will also ask for a personal financial statement, this will give the lender an idea of your net worth as well as help put together a global cash flow. It also helps us determine what is out there for potential equity in assets if needed. The last thing a lender may ask for is any other information you have on the asset you are looking to purchase. Will you need money to improve the purchase, will you need working capital, will you need to hire additional staff, will capital have to be raised in order to satisfy a down payment requirement? All pieces of information required or asked for by the lender are tailored to the type of loan request and more information may be required after-wards, but this will be a good start.
If it is equipment, can we get an invoice, or background information on that equipment. If it is an existing business, can we get past and current financials for that business, as well as an asset list, business plan, purchase agreement, or anything that may be associated with the purchase so we can see evaluate what the collateral may be and if it will cash flow. If it is Commercial Real Estate you are looking to purchase, the lender may ask for a pro-forma. The more detailed the pro-forma the better. Does the pro-forma list rent rolls, expenses associated with the property, market competition, projections of what you plan to change if anything, and even history of the property? This also helps the lender determine what collateral position they will be in and what the LTV will be. It will also help determine what the Debt Service Coverage (DSC) and Cap Rate currently are, and what those numbers will project to be after the purchase. In the end it is all about cash flow.
The next question you may ask is will the commercial loan request get approved? Most lenders will go into the request with an open mind and look into all options available to help make this work, with the intent that the lender is doing the right thing for the customer and the request makes sense. Once a lender has received your application, they’ll use several factors to make their decision. If your request is approved, these same factors will also be used to determine what terms and rates you qualify for. Once the lender is comfortable with the request and the documentation provided they will seek approval. The approval process will vary from institution to institution but where I work, it is a tiered system depending on the amount requested. Larger projects will get presented at loan committee and discussed by senior management. They will in turn discuss how the credit looks, the DSC & LTV, the collateral position, and any risk associated with the request. Banks are open to new business all the time and will do what they can to help make it work for the customer. Like is stated earlier, lenders just want to make sure they are putting the customer in a successful position and help them succeed.
Derek Simonsen is a business banker at First National Bank in Sioux Falls. Find him at https://www.fnbsf.com/our-team/derek-simonsen/ Opinions expressed in this article reflect only those of the author. Neither Derek Simonsen or First National Bank in Sioux Falls are sponsors of DoctorEquity.