How to Prepare When Applying for a Business Loan

New publication explains steps to take to help get your new business idea funded

March 19, 2021, 10:15 am | Craig Chase

Exchanging cash, by AungMyo/stock.adobe.com.AMES, Iowa – If you’re looking to start a new business or expand on something you’re already doing, you may be in need of a loan. If so, there are certain steps you can take to help make the process go better and increase your chances of being funded.

Craig Chase, program manager for Farm, Food and Enterprise Development with Iowa State University Extension and Outreach, has authored a new publication called “Getting Your New Business Idea Funded.”

The publication helps borrowers learn to think like lenders, being prepared to show a well-prepared business plan, balance sheet and “The 5 Cs” of what lenders look for when evaluating a borrower: character, conditions, capital, collateral and capacity.

“Put yourself in the lender’s perspective,” said Chase. “If you were the lender, these are the things they are thinking of when they decide whether to lend you money.”

Chase said many farmers and other entrepreneurs are looking to try something new with their operation, to help diversify or to respond to market changes created by COVID-19. One popular topic has been direct marketing, whether it’s for meat sales, produce or something else.

In simplest form, a loan agreement with a lender obligates the borrower to repay the loan on time, including an amount of interest to cover the risk to the lender. Interest rates and other conditions will vary based on the perceived level of risk to the lender, and the borrower’s ability to manage risk.

Chase said borrowers need to explain the context of their business, how different resources will be used and how revenue and profits will be created. He said it’s important not to assume the lender is familiar with the type of business to be funded, because they may not be.

“If there are holes in the plan or a lack of information, someone has to fill in those details,” he said. “If the farmer doesn’t give the right kind of information or enough information, often it’s the lender who fills in the blanks, and often it’s in the lender’s favor.”

The publication also includes a 10-point checklist borrowers should consider before applying for a loan, including a review of their credit score, loan to asset ratio, cash flow and working capital.

The information was reviewed by Paul Dietmann, senior lending specialist with Compeer Financial of Wisconsin, who contributed content and reviewed it for accuracy.

For more information, Chase can be reached at 515-294-1854 cchase@iastate.edu. Or visit the Farm, Food and Enterprise Development site online.

 

Photo caption: Exchanging cash, by AungMyo/stock.adobe.com.

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