Preparing a Loan Application All lenders will request credit information when you apply for a loan for business purposes. The forms you are required to complete may vary in appearance and format, but the basic information will be the same. Following are some general guides to help you evaluate your loan proposal. By knowing what a lender is looking for, you may be better prepared to discuss your needs and the strengths of your request. Lenders generally review two categories of information: 1) the creditworthiness of the borrower, and 2) the financial information associated with the loan. Each of these areas contain several components, some of which are briefly described below. Credit worthiness: An evaluation of creditworthiness includes a review of your credit history, repayment record, experience and training, etc. Generally, lenders will obtain a credit report from a credit reporting agency to review your credit history. You may want to obtain such a report for your own use to verify the information; errors are not uncommon and many people have found they cannot get loans because of an erroneous credit report. The following credit reporting companies can provide you a copy of your report; usually a fee of about $20.00 is involved. EQUIFAX:.....................................1-770-612-3200 (consumer) CREDCO OF OREGON:..............1-800-458-5548 (commercial) NACM-OREGON/TRW:..............1-800-622-6985 (commercial) A free report, once per year, can be obtained by writing: TRW Complimentary Report P.O. Box 8030 Layton, UT 84041-8030 Financial Information: Depending on the purpose of the loan (operating, purchase, capital improvement, expansion, etc.), lenders may require different financial statements about the operation. The two most common financial statements required by lenders are the balance sheet and the income statement. Some lenders also require a cash flow statement, particularly if the loan is for operating purposes. These documents can be obtained from most any lender, and many variations exist. It is strongly suggested that the prospective borrower obtain financial forms, and complete and evaluate them before making a loan application. Your bank will have financial forms which might provide you with a good format to evaluate the operation and the loan request. The Balance Sheet A balance sheet lists the assets and liabilities of the business and the owner/operator. It documents the net worth (difference between assets and liabilities), and provides information to calculate various ratios measuring the solvency (or long-term financial strength) of the operation, and the liquidity (or short-term financial status) of the operation. Once debts and assets have been totaled, the debt-to-asset ratio can be computed. This measures the amount of total debt compared to total assets. Lenders prefer this ratio to be less than .45, meaning the operation should have no more than 45 percent debt compared to total assets. Debt-to-asset Ratio = total debts/total assets Preferred ratio = less than .45 Other ratios that lenders will evaluate include the liquidity ratio, the cash flow margin, and debt service coverage. The liquidity ratio is calculated by dividing current assets by current debts. This measures the ability of the operation to meet debts which are payable in the near future. Lenders prefer this ratio to be no less than 1.25. In other words, at least a 25 percent margin should exist between short-term obligations (accounts payable, accrued interest and notes payable within 12 months, taxes, etc.) and the value of short-term assets, such as cash-on-hand, savings accounts, inventorey held for sale. Liquidity Ratio = short-term assets/short-term debts Preferred Ratio = 1.25 or higher The next ratio requires the preparation of a cash flow statement. Lenders prefer that a monthly cash flow statement be prepared for at least one year. This statement shows the expected cash outflows and inflows throughout the coming year, detailing when additional monies may be needed, and when surplus income will be available to repay debt. Lenders are looking to see if the projected operation can support all necessary operating costs, living expenses (unless these are provided by an outside job or other source), and repay borrowed funds on a timely basis. The cash flow margin is computed by subtracting monthly (or annual) cash expenses from gross cash income, then dividing by monthly (or annual) expenses. Lenders prefer a 15 to 25 percent margin. In other words, monthly (or annual) cash income should exceed cash expenses, including interest payments on debt, by 15 to 25 percent. Cash Flow Margin = [gross cash income - cash expenses (including interest)] / total cash expenses The debt service coverage ratio is computed after completing an income statement. This ratio shows the income generating ability of the operation toward servicing the total debt. The calculation uses net cash farm income (plus interest) divided by debt payments (principal and interest). Lenders prefer this ratio to be 1.15:1 to 1:25:1. Debt Service Coverage = Net Cash Farm Income + interest / interest and principal payments Net Cash Income = net business income, plus depreciation and net off-business income, less living expenses and income taxes. This discussion of lender qualifications for business loans has covered only a few of the items which lenders evaluate. Other considerations include the experience and management skills of the operator/borrower, the value of property to be purchased, market conditions, and other subjective factors. However, by completing financial forms ahead of time; evaluating the strengths and weaknesses of the application by computing various ratios; investigating credit reports; keeping good records of production, expense and income; and documenting repayment history, the prospective borrower will enhance the probability of obtaining a loan and better understand the decision process of the lender. Back to the Business Development Section