1 00:00:02,360 --> 00:00:06,190 This section will give you an overview of the loan application process. 2 00:00:06,290 --> 00:00:11,930 Each lender has a slightly different process in each type of loan has processes unique to that type. 3 00:00:11,930 --> 00:00:17,490 When you apply for a loan your banker will explain the specifics for your loan and their organization. 4 00:00:17,510 --> 00:00:22,240 In addition I'll show you how to decide if your lender is the right fit for you. 5 00:00:22,310 --> 00:00:27,330 Knowing the basics in this section allows you to be better prepared for the application process. 6 00:00:27,350 --> 00:00:31,340 This will reduce your stress and decrease the application process time. 7 00:00:31,340 --> 00:00:36,050 It also allows you to start gathering or creating key documents now before you formally apply for the 8 00:00:36,050 --> 00:00:37,280 loan. 9 00:00:37,280 --> 00:00:42,710 Being ready also shows your lender that you are a competent professional and easy to work with the lender 10 00:00:42,710 --> 00:00:45,320 will do all sorts of financial analysis. 11 00:00:45,560 --> 00:00:49,970 On the other hand we're all human and everything you do in the application process communicates your 12 00:00:49,970 --> 00:00:56,100 credibility to your lender before we dive into the specific documents and analysis of the application 13 00:00:56,100 --> 00:00:57,080 process. 14 00:00:57,090 --> 00:01:01,860 I wanted to give you the high level questions your lender is trying to answer in the application process 15 00:01:03,280 --> 00:01:06,060 they first want to understand why you want this loan. 16 00:01:06,070 --> 00:01:12,240 Another way of asking this question is What will you use the loan proceeds for one common reason for 17 00:01:12,240 --> 00:01:16,360 a loan is to make an investment that will provide a stream of future cash flow. 18 00:01:16,500 --> 00:01:21,210 A great quote by Norman Ralph Augustine is it's easy to get a loan unless you need it. 19 00:01:21,240 --> 00:01:23,790 Like all great jokes it has a kernel of truth. 20 00:01:23,820 --> 00:01:28,740 You obviously need cash you don't have if you're applying for a loan the bank wants to know how the 21 00:01:28,740 --> 00:01:32,750 loan will improve your financial situation so you can pay the loan back. 22 00:01:32,760 --> 00:01:36,090 Some businesses have a very low chance of success. 23 00:01:36,090 --> 00:01:42,130 Lenders won't make the loan if they see it as only delaying the inevitable failure of a business. 24 00:01:42,130 --> 00:01:46,420 The question of how you will use the loan is closely linked to the question of how you will pay back 25 00:01:46,420 --> 00:01:47,500 the loan. 26 00:01:47,500 --> 00:01:51,050 Lenders are very conservative investors unlike owners. 27 00:01:51,070 --> 00:01:56,890 Their reward is capped the interest and fees they charge their investment quickly becomes unprofitable. 28 00:01:56,890 --> 00:02:00,390 If there is even a small chance that you won't be able to pay back the loan. 29 00:02:00,700 --> 00:02:04,000 Larger loans will be reviewed by multiple people at the lender. 30 00:02:04,000 --> 00:02:09,190 On top of that regulators review business loan files to confirm that the loan was made in a safe and 31 00:02:09,190 --> 00:02:15,730 sound manner to the bank because loan officers must be so cautious they will identify at least two sources 32 00:02:15,730 --> 00:02:18,070 of repayment for business loans. 33 00:02:18,070 --> 00:02:21,910 The primary source of repayment is usually the cash flow of the business. 34 00:02:21,910 --> 00:02:26,950 Other sources of repayment are cash from the personal guarantees of owners or liquidation of the collateral 35 00:02:26,950 --> 00:02:28,480 pledged for the loan. 36 00:02:28,480 --> 00:02:34,160 I'll explain pledging collateral and personal guarantees later in this course proving the strength of 37 00:02:34,160 --> 00:02:38,420 your projected cash flow is crucial to whether your loan is approved and what interest rate you will 38 00:02:38,420 --> 00:02:39,330 pay. 39 00:02:39,380 --> 00:02:44,180 Once again the primary source of repayment of the loan is usually the cash flow of your business. 40 00:02:44,180 --> 00:02:47,930 Cash flow is keen to you as the owner and it's King to your lender. 41 00:02:47,930 --> 00:02:52,850 I approved loan pricing at one financial institution for all loans over one million dollars whose rate 42 00:02:52,850 --> 00:02:55,030 was fixed for more than five years. 43 00:02:55,040 --> 00:02:58,970 The strength of the borrower's cash flow determined whether the borrower was offered a low interest 44 00:02:58,970 --> 00:03:03,350 rate more than any other factor except maybe character which I'll discuss in the next section of this 45 00:03:03,350 --> 00:03:03,830 course 46 00:03:06,840 --> 00:03:10,100 yes collateral matters but not as much as you may think. 47 00:03:10,190 --> 00:03:13,860 I'll show expectations for a collateral value in the next section. 48 00:03:13,860 --> 00:03:18,920 Remember though that the collateral only matters if something has gone wrong with the borrower's cashflow. 49 00:03:18,930 --> 00:03:23,730 It's like insurance you don't buy insurance hoping to collect on it because of some tragedy. 50 00:03:23,730 --> 00:03:26,750 Some borrowers will point out how good their collateral is. 51 00:03:26,760 --> 00:03:31,350 Lenders do not want to foreclose on real estate or other company assets you pledge as collateral for 52 00:03:31,350 --> 00:03:32,310 the loan. 53 00:03:32,310 --> 00:03:36,690 The lenders profit margin on a loan is so low that they usually lose money on the loan if they have 54 00:03:36,690 --> 00:03:38,250 to repossess collateral. 55 00:03:38,250 --> 00:03:44,340 It's a massive time suck and stress for everyone involved just like the bank deciding if your loan is 56 00:03:44,340 --> 00:03:45,720 a good investment for the bank. 57 00:03:46,050 --> 00:03:49,520 You can decide if the bank or lending institution is right for you. 58 00:03:49,530 --> 00:03:54,090 For example if you're a small business owner that likes personal interaction and guidance during the 59 00:03:54,090 --> 00:03:55,260 loan process. 60 00:03:55,260 --> 00:03:59,910 Working with a community bank may be better for you than the more automated processes used by some other 61 00:03:59,910 --> 00:04:00,970 lenders. 62 00:04:00,990 --> 00:04:03,540 Some lenders have industry specializations. 63 00:04:03,540 --> 00:04:07,460 I worked at one bank that specialized in agricultural lending to family farms. 64 00:04:07,470 --> 00:04:12,890 I worked for another bank that had top tier private banking wealth management and trust services. 65 00:04:12,990 --> 00:04:16,890 Also look at the bank from the perspective of your full banking relationship. 66 00:04:16,890 --> 00:04:21,900 Is this bank convenient or responsive for all your other banking needs like deposit products personal 67 00:04:21,900 --> 00:04:26,460 banking for the owner or merchant services for your debit and credit card processing. 68 00:04:26,460 --> 00:04:30,620 I've done a lot of customer profitability analysis over the past 20 years. 69 00:04:30,960 --> 00:04:36,210 The profitability from deposits is more than the profitability of loans for most business customers. 70 00:04:36,240 --> 00:04:41,400 There's a reason the titles of business bankers has shifted from loan officer to relationship officer 71 00:04:41,430 --> 00:04:43,460 over the past few decades. 72 00:04:43,500 --> 00:04:48,920 There's a reason your banker also ask you to move your deposits to their bank if you borrow from them. 73 00:04:48,930 --> 00:04:53,640 Many borrowers will shop around their commercial real estate loans to multiple banks or use a loan broker 74 00:04:53,640 --> 00:04:56,610 to do this to get the lowest rate banks price. 75 00:04:56,610 --> 00:05:00,990 These loans as loss leaders or low profit leaders at least to get their business. 76 00:05:00,990 --> 00:05:06,720 However many banks have moved or are moving to customer profitability modeling in these models. 77 00:05:06,720 --> 00:05:11,570 The profit from deposits and other services allows the banker to offer low loan rates. 78 00:05:11,610 --> 00:05:16,410 You may have underestimated how valuable your deposits are to a bank and what that can lead to and good 79 00:05:16,410 --> 00:05:22,540 loan pricing for accountants watching this course learn who the leading business bankers are for different 80 00:05:22,540 --> 00:05:24,690 industries or types of businesses. 81 00:05:24,730 --> 00:05:29,130 It's easy to refer everyone to one or two bankers but they may not be the right fit for your client 82 00:05:30,110 --> 00:05:31,540 in the beginning of your business. 83 00:05:31,580 --> 00:05:36,290 You may be thankful that any bank would make a loan to you as your business becomes more successful 84 00:05:36,290 --> 00:05:37,130 and grows. 85 00:05:37,160 --> 00:05:42,320 You'll want to know if your bank can meet your needs as you grow that community bank with personal service 86 00:05:42,320 --> 00:05:47,180 may lack the branch network or breadth of products to serve your needs down the road. 87 00:05:47,180 --> 00:05:51,380 Banks are limited on how big of a loan they can make based on the size of their capital. 88 00:05:51,470 --> 00:05:56,300 If you borrow large amounts of money from a smaller bank they may sell portions of your loan to other 89 00:05:56,300 --> 00:05:56,930 banks. 90 00:05:56,930 --> 00:05:59,390 This is called participating out your loan. 91 00:05:59,840 --> 00:06:06,050 That can slow down the approval process and make future loan modifications much more challenging like 92 00:06:06,050 --> 00:06:07,180 I mentioned earlier. 93 00:06:07,190 --> 00:06:12,890 Banks have migrated to calling the business bankers by the title of relationship officers find out which 94 00:06:12,890 --> 00:06:18,200 of these officers you can really form an advisory relationship with and which officers treat loans just 95 00:06:18,200 --> 00:06:21,720 like transactions when you are under a tight deadline on a loan. 96 00:06:21,740 --> 00:06:23,580 You want someone who is responsive. 97 00:06:23,750 --> 00:06:28,070 Bankers work with many borrowers and some have formed industry specializations. 98 00:06:28,100 --> 00:06:30,990 They learn a lot about you during the application process. 99 00:06:31,010 --> 00:06:34,530 They can be a wealth of knowledge to you about how to improve your business. 100 00:06:34,550 --> 00:06:38,170 Don't confuse them for consultants but they can provide many tips. 101 00:06:38,180 --> 00:06:43,400 There are also great referral sources when you need other services like accountants and attorneys for 102 00:06:43,400 --> 00:06:48,440 accountants watching this course consider how you can network with business bankers bankers accounts 103 00:06:48,440 --> 00:06:53,480 and attorneys working together for the client enhance client satisfaction and build networks where everyone 104 00:06:53,480 --> 00:07:00,420 wins the loan application process can be broken down into four main steps. 105 00:07:00,460 --> 00:07:04,970 The first step is completing the loan application and giving the lender a pile of documents. 106 00:07:05,080 --> 00:07:09,340 I'll list out and explain many of these documents later in the section of the course. 107 00:07:09,400 --> 00:07:13,930 Next the lender will analyze those documents and decide whether to offer a loan to you. 108 00:07:13,930 --> 00:07:19,270 That process is called loan underwriting and I have a whole section on it later in this course. 109 00:07:19,270 --> 00:07:24,460 Third the lender will notify you of their approval pricing and critical requirements for the loan. 110 00:07:24,460 --> 00:07:28,810 Some of you will just be praying to get approved and will immediately take the loan if it's given you 111 00:07:29,350 --> 00:07:34,090 other of you have more financial strength and can negotiate for prime rates either when you make your 112 00:07:34,090 --> 00:07:37,540 application or once you have approvals from one or more lenders. 113 00:07:37,540 --> 00:07:40,300 The final step is the actual loan closing. 114 00:07:40,330 --> 00:07:43,670 This is when you sign a set of loan documents to receive your money. 115 00:07:43,690 --> 00:07:48,820 I have a whole section later in this course on the key documents you will sign get a copy of the loan 116 00:07:48,820 --> 00:07:51,100 documents before you sign them and read them. 117 00:07:51,190 --> 00:07:55,150 If you don't want to read them or don't think you'll understand them have an attorney or account. 118 00:07:55,140 --> 00:07:57,480 Read them and offer their insights. 119 00:07:57,490 --> 00:08:02,440 I was the CFO of a bank and we hired an attorney to review a branch lease we were entering into. 120 00:08:02,440 --> 00:08:06,790 We all need the services of an expert for significant contracts. 121 00:08:06,790 --> 00:08:11,560 Make sure you are confident you can meet all the requirements the loan documents understand your rights 122 00:08:11,560 --> 00:08:13,400 and responsibilities. 123 00:08:13,420 --> 00:08:17,950 It's now time to explain some of the major forms you'll fill out or documents you'll need to gather. 124 00:08:17,980 --> 00:08:23,020 When you apply for a loan some of these take time to prepare so start preparing them as soon as you 125 00:08:23,020 --> 00:08:28,520 think you'll be applying for a loan the application is the form from the lender where you enter the 126 00:08:28,520 --> 00:08:33,590 basics about you what type of loan you want how much you want and why you want the loan. 127 00:08:33,680 --> 00:08:38,710 Each lender has a different form a business plan is the story of your business. 128 00:08:38,760 --> 00:08:44,590 It may be as hokey as a made for TV holiday movie or as compelling as a Hollywood blockbuster hit. 129 00:08:44,640 --> 00:08:49,320 I'll get into more details in the underwriting section but you want your story to show the lender how 130 00:08:49,320 --> 00:08:53,980 you have the cash flow strength to pay back the loan even if things don't go according to plan. 131 00:08:54,270 --> 00:08:57,810 Your plan is critical to the credibility of your business. 132 00:08:57,870 --> 00:09:01,330 The lender will request the resumes of major owners and managers. 133 00:09:01,500 --> 00:09:07,730 They want to confirm the competence of the business team your financial health and how you've used loans 134 00:09:07,730 --> 00:09:11,600 in the past are powerful indications of how likely you are to pay back this loan. 135 00:09:13,380 --> 00:09:17,570 Leases are a form of debt that you didn't have to put on your balance sheet in the past. 136 00:09:17,580 --> 00:09:22,830 This is all changing right now due to changes in the accounting rules for leases in the past. 137 00:09:22,890 --> 00:09:25,420 Many leases were considered operating leases. 138 00:09:25,560 --> 00:09:30,600 The future payments on those leases didn't need to be included in the debt section of your balance sheet. 139 00:09:30,630 --> 00:09:34,770 A new accounting rule says those payments do need to be included in the debt section of your balance 140 00:09:34,770 --> 00:09:35,460 sheet. 141 00:09:35,490 --> 00:09:41,580 You'll also book a new asset for the right to use the least assets in a rough one two punch your return 142 00:09:41,580 --> 00:09:48,890 on assets goes down and your debt ratios go up appraisals are required for large real estate loans. 143 00:09:49,010 --> 00:09:54,080 The lender will want a solid valuation or appraisal of any asset that's pledged on the loan as collateral 144 00:09:54,140 --> 00:09:56,870 or as critical to the value of your business. 145 00:09:57,230 --> 00:10:02,690 Your accounts receivable agent report acts both as evaluation of your accounts receivable asset and 146 00:10:02,690 --> 00:10:08,270 as an indicator of your future cash flows the accounts receivable report breaks the cash owed from your 147 00:10:08,270 --> 00:10:12,620 customers into buckets based on how many days past do they are common. 148 00:10:12,620 --> 00:10:19,220 Buckets are current or not past due 30 days past due or less 31 to 60 days past due. 149 00:10:19,490 --> 00:10:23,700 60 to 90 days past due and over 90 days past due. 150 00:10:23,870 --> 00:10:29,900 Large amounts of past due receivables usually indicates poor cash flow and future uncollected Bill amounts. 151 00:10:29,900 --> 00:10:34,010 Your receivables may be part of the way the lender determines how much you can borrow on your line of 152 00:10:34,010 --> 00:10:34,700 credit. 153 00:10:34,880 --> 00:10:41,070 The better your accounts receivable the more you'll be able to borrow against it your business cash 154 00:10:41,070 --> 00:10:46,020 flows may be dependent on a few large contracts your lender will want to verify the amount of those 155 00:10:46,020 --> 00:10:49,870 contracts and the likelihood they will stay with you in the future. 156 00:10:49,960 --> 00:10:55,300 We're talking about banking seeing new cold hard income numbers would be required at some point. 157 00:10:55,300 --> 00:10:59,770 The two main sources for this are your tax returns and your financial statements. 158 00:10:59,770 --> 00:11:03,780 You'll probably be asked to provide the tax returns for the past two years. 159 00:11:03,880 --> 00:11:08,140 Credit analysts at the lender will spread your statements or spread your returns. 160 00:11:08,140 --> 00:11:12,970 This just means that they will do financial analysis and trend analysis on them to assess your financial 161 00:11:12,970 --> 00:11:13,300 health. 162 00:11:14,540 --> 00:11:18,030 Lenders look at your cash flow more closely than other investors. 163 00:11:18,080 --> 00:11:20,010 You can't pay your loan with profits. 164 00:11:20,030 --> 00:11:21,650 You can only pay cash. 165 00:11:21,780 --> 00:11:27,070 The balance sheet and income statement give them indications of your current and past financial performance. 166 00:11:27,230 --> 00:11:33,390 But the cash flow statement will show how that translated into actual cash the cash flow projection 167 00:11:33,390 --> 00:11:39,760 and your business plan shows your estimate of your future ability to pay back the loan aggressive tax 168 00:11:39,760 --> 00:11:42,970 strategies can cause you heartache when you apply for a loan. 169 00:11:42,970 --> 00:11:47,800 Many owners and their accountants do all they can to show low earnings on the tax return. 170 00:11:47,800 --> 00:11:53,050 They then submit those returns to a lender who wants to see good earnings and cash flow aggressively 171 00:11:53,050 --> 00:11:57,520 reducing your income on your tax return means you have more work to do to show the lender how you'll 172 00:11:57,520 --> 00:12:00,730 pay back the loan for the accountants taking this course. 173 00:12:00,730 --> 00:12:03,610 You may be better able to explain this to the lender than the owner. 174 00:12:03,610 --> 00:12:09,670 If the bank asks about it also for the accounts watching this you know that your clients request tax 175 00:12:09,670 --> 00:12:14,910 returns and financial statements if they're applying for a loan you may have also collected critical 176 00:12:14,910 --> 00:12:20,790 financial documents that you can easily provide to your client to help them gather info for the application. 177 00:12:20,880 --> 00:12:25,860 You may have these documents in a digital format needed by the lender and to be honest your records 178 00:12:25,860 --> 00:12:27,710 may be more organized than your clients. 179 00:12:27,990 --> 00:12:34,820 Yes I've seen clients arrive with literal shoeboxes of receipts documents like your articles of incorporation 180 00:12:34,880 --> 00:12:40,460 organization documents partnership agreements and business licenses serve multiple functions. 181 00:12:40,670 --> 00:12:44,450 The first purpose is to reduce crime and fight terrorism. 182 00:12:44,450 --> 00:12:49,940 Ever since 9/11 regulators have been greatly increasing the requirements of financial companies to know 183 00:12:49,940 --> 00:12:52,820 the identity of businesses and business owners. 184 00:12:52,820 --> 00:12:58,880 This is required by the Bank Secrecy Act or BSA and it's a really big deal to regulators. 185 00:12:58,880 --> 00:13:02,710 The requirements for identifying business owners increased a few years ago. 186 00:13:02,720 --> 00:13:05,840 Please understand this when your lender asks for these documents. 187 00:13:05,960 --> 00:13:12,290 As the saying goes In God We Trust everyone else must provide data not having some of these documents 188 00:13:12,290 --> 00:13:17,060 or having really poor ones may indicate to the lender that you haven't complied with requirements. 189 00:13:17,090 --> 00:13:22,220 This could lead to fines or penalties that could hurt your future cash flows not complying with government 190 00:13:22,220 --> 00:13:27,620 regulations doesn't bode well for your ability to follow the loan agreements and its requirements. 191 00:13:27,860 --> 00:13:32,360 The documents on this slide identify the owners who may be asked to provide personal guarantees for 192 00:13:32,360 --> 00:13:33,210 the loan. 193 00:13:33,230 --> 00:13:37,490 Lenders may need those owners personal tax returns financial statements or credit scores.