 | Mike Sikes
is Senior Vice President and Chief Lending Officer for Prairie State Bank. He has over 24 years of banking experience. Mike is a member of the Wichita Area Builders Association, the Wichita Area Association of Realtors and serves on the board of directors for the Boy Scouts of America Quivera Council. You may contact Mike at (316) 775-5434 or msikes@prairiestatebank.com |
Banking & Finance
2004-09-01 12:08:00
Understanding loan fundamentals
: How does a bank decide whether to give me a business loan?
ANSWER: Under-standing a few fundamentals can make the process a lot smoother. Before making the decision to grant a business loan the bank will want to meet with the business owner and spend some time getting to know the owner as well as get a thorough understanding of the business and how it operates. The bank will most likely require the borrower to provide at least 3 years of financial statements and tax returns. Depending on the size of the loan the bank may require reviewed and audited financial statements. Typically the bank will also require the owner of the business to personally guarantee the loan. If this is the case the bank will also require at least 3 years of personal tax returns and a current personal financial statement. Once this information is received the loan officer will analyze the information to determine the creditworthiness of the business. The bank will analyze a number of items including the company's profit trend, sales, expenses, liquidity, cash flow and current amount of debt. The bank will also analyze the creditworthiness of the guarantor(s) by analyzing the tax returns, the personal financial statement and a credit report.In addition to analyzing the financial information the bank will review the type of collateral that will be used for the loan. Typically a business loan will be used to finance inventory and receivables, purchase new equipment or purchase or refinance real estate. The type of collateral will normally determine the length of term the bank will allow.In making the decision to make the loan the bank will look to see if the business is generating sufficient cash from the operation of the business to pay the existing bills as well as service the debt on the new loan. Normally the cash flow is the most important factor that the bank considers, although the type and value of the collateral as well as the creditworthiness of the guarantor are also looked at very closely.Most banks try to structure the loan in a way that meets the demands of the business while maintaining a good quality loan for the bank. Many banks will also offer business loans guaranteed by the Small Business Administration, which can be helpful for newer businesses which lack sufficient collateral to secure the loan.
