Define need before applying for business loan

Most New Mexico entrepreneurs can’t start or operate a small business without occasionally borrowing money. And that requires preparation and a methodical approach.

It begins by identifying why the money is needed and the most appropriate loan to fulfill that need. It continues with finding a lender that offers optimal terms and fees for clients with the borrower’s credit score and financial resources and gathering documents the lender needs to review.

• Define the need: Businesses may need loans for daily operating expenses or to build reserves, renovate a commercial building or buy equipment. The specific need drives the decision about what type of loan to shop for. Some lenders underwrite almost any business need while others specialize: The nonprofit Enchantment Land Certified Development Company, for example, specializes in loans for commercial, owner-occupied property and equipment.

• Identify potential lenders: Owners of a startup may have difficulty obtaining a loan from a traditional lender because these institutions want to see a solid track record or proof of a consistent cash flow to finance repayment. Startup owners might need to use business credit cards, borrow from family and friends, apply for a personal loan at a community bank or seek a microloan from a nonprofit community development financial institution like Accion, The Loan Fund and WESST.

• Evaluate credit worthiness: Prospective lenders will scrutinize the borrower’s credit score and the business’s track record and revenue stream to determine whether it’s a good risk. Borrowers with the highest credit score (700 or above for banks, 600 for CDFIs), greater sales volume and longer operating history typically are offered lower interest rates and more flexible repayment terms, but even borrowers with lower scores and minimal cash reserves can get loans if they’re willing to pay higher interest, provide a credible business plan and offer sufficient collateral.

• Compare terms and conditions: The best loan has the lowest annual percentage rate and most manageable repayment terms. An online lender may seem like a good option, but it is a poor choice when the owner has to make multiple payments each month at a high interest rate. If the owner is unable to make timely payments, a local banker may be able to work with the borrower to restructure the loan to a level that allows the business’s cash flow to permit the diversion of revenue to loan payments.

• Assemble documentation: Before applying for a loan, the borrower should compile all the financial paperwork the lender expects: tax returns and bank statements for the business and its principals, business financial statements (profit and loss, balance sheet, revenue and cash flow forecasts) and any legal documents pertaining to its operation. While a sole proprietor might not have articles of incorporation, for example, he might have lease agreements or other contracts.

For more about how to prepare for a loan request, visit financenewmexico.org/preparing-to-request-a-loan/ .Go

to financenewmexico.org/category/funding/ to learn more about commercial lenders.

Finance New Mexico connects individuals and businesses with skills and funding resources for their business or idea. To learn more, go to FinanceNewMexico.org.