Commercial Business Lending Fundamentals

business planning

In order to obtain a Commercial loan, a company has to answer the following 4 questions:

  • Why do we need a loan

  • How will we pay it off

  • If we cannot pay it off, what assets can the company pledge as collateral

  • If the collateral is also not sufficient to pay off the loan, what’s the back-up security

The answers to the above 4 questions determine a bank’s appetite for granting the company the desired loan. Each of the these answers need to be very specific and clear so that the bank is confident that the company’s owners know what they are doing, that they are responsible with their money and so will also be responsible with the bank’s money. The above questions focus on the following key concepts in any business:

  • What are the company’s plans

  • What is the company’s budget or cash flow forecast

  • What hard assets does the company have

  • How strong is the owners’ personal covenant

“If you fail to plan, you are planning to fail.” – Benjamin Franklin

Too often, companies do not have a clear picture of the above factors. In fact, one of the often heard answers is that “the business plan is in my head”. Many companies do not budget in the level of detail that a bank needs and rarely have a monthly cash flow projection. This is often the case for growing companies that are at the cusp of graduating to be commercial borrowers. While growing and aspiring for low-cost financing is great – it is not enough to only wish for it.

Lending specialists at Platinum Consulting recognize that business owners are (a) too busy in the business to devote time to these things, and (b) are not necessarily experts on these matters, at least not sufficiently to impress the best commercial lenders. Hiring a professional can be expensive, but wait till you hire an amateur.