The Importance of an Accurate Commercial Loan Application, or the Story of How I Ended Up in Advanced Calculus

Many, many years ago, college course registration required the student to stand in line for desired classes. There was always a mad dash to get in the line for the best ones, typically those that allowed for easy A’s, late meet times, and good professors. Punch cards would be given out for each course until it was full. After all cards were obtained, the student then copied the class codes from the punch cards onto a form that secured enrollment in each class. On one such day of excitement, I was in a rush to fill out the last form. I wrote a 3 that looked rather more like an 8, and I ended up in Advanced Calculus instead of Ocoee River Rafting 101. Now, you might be wondering how this could possibly be relevant to business banking…

Just as it was in the days before personal computers, attention to detail and clear written communication are supremely important when providing a well-developed loan application to a bank. While it may seem that a tiny error won’t have that great of an impact, it can greatly slow the loan process, which may be harmful to you or your business. Regardless of whether you are applying to a bank for a commercial or personal loan, equipment loan, real estate loan, or a line of credit, the elements a banker will be looking for in the loan application process are the same.

Banks vary in their processes for loan applications. For example, FAB does not use a formal commercial loan application, but prefers one-on-one meetings with clients instead, in order to more fully understand the borrower and the business. But at the end of that initial meeting, several form documents are provided to you, the borrower, as well as a considerable deal of information requested from you. This is where written communication becomes so important. For banks with a formal loan application, it plays an even greater part.

Three “form documents” regularly used are the personal financial statement, debt schedule, and schedule of real estate owned (for someone who owns investment property). All three of these are critical in the underwriting process and need to be filled out carefully, signed, and dated. This is the chance for you, the borrower, to review your financial condition. The forms ask that rates and maturities be indicated for underwriting. Many times in this process, applicants and the banker will recognize opportunities for refinancing. All of this assessment relies heavily on the accuracy of the information you provide, so be careful to check your work. A mistake may not be as harmful to your business as Advanced Calculus might have been to my GPA, but it could cause your banker to overlook some opportunities that could be beneficial to you.

Also essential to any commercial loan application are three years of tax returns and copies of extensions. If you are a frequent borrower, it’s a good idea to have a return filed by April 15th, and not file an extension. Often, banks are underwriting in September, based on tax returns over 18 months old. There is a way to fill this gap, but timely tax returns make the process much faster. Additionally, far too often, the process is slowed by a borrower only providing the first two pages of the tax returns. Be sure to include the complete returns, as any bank will need them with all schedules and K1’s.

In addition to tax returns, many banks will need “company prepared” statements, aging reports, and other internal statements. If a tax return has not been filed for the preceding year end, an internal statement will be needed. It’s very important to take a few minutes to review those with your banker to ensure that they are correct and explain in-house terminology, as this is another place that a mistake could hinder the loan process. Also, develop a financial projection and show all underlying assumptions to that projection.

Finally, every business is complex, and bankers are retaining a great deal of information daily. Even if you do not have a formal business plan, it’s good practice to create a simple written communication piece. Brag on your business and accomplishments, tell what your business does, who your customers are, who your suppliers are, long term goals, etc. This is extremely helpful in assisting the bank in providing an underwriting package that is well-developed. Even if you are a longtime borrower and working with an established relationship officer, this is a very effective way to communicate accomplishments on an annual basis. (Here is an article to help you create a business plan.)

Sometimes, 3’s look like 8’s, and the loan process gets slowed down. But a little extra time and diligence on the front end can speed the process for all involved, and ensure that you, the borrower, reap all of the benefits of having a banker examine the details of your business.

Regarding my calculus career, after a few days of inconvenience, the mistake was mercifully corrected. The Ocoee River was delightful.