Here's An Outline Of A Business Financing Application Package

A business financing application package contains all the initial information you will provide to a lender for them to intake and assessing your financing requirements.

While most of the information that should be included in an application package is featured within reports and documents that most businesses should have readily available to them, the process of putting together an application package is about information content, as well as information understanding and context.

So if content is considered “King” then in the business financing world, context would be “Queen”.

Let me explain.

You as a business owner or manager know and understand your business both thoroughly and intimately.  Any Lender that were to consider a financing application for your business does not have any where close to the same level of understanding or comprehension as it relates to your business.  The lender may understand the industry you’re in, and may even have some historical knowledge gained from past interactions with you, but they at best only have a cursory understanding of your business.

Any significant lending organization will intake and process hundreds of applications for business financing a month.  For some, it could be thousands.  One of the main goals of any lender is to assess applications as quickly as possible, zero in on applications that can be approved, and work diligently to get those targeted files through the system and funded.  For all the rest, where a fit is not apparent, decline the file, and move on to the next application.

Lending is a volume based business.  As we’ve previously discussed, lenders are made up of organizational structures and procedures that are designed to work through all the financing requests received.  The organization and procedures are run by individuals with varying levels of qualification and experience. In the quest to be a volume processer, application information received will be reviewed quickly, assessed quickly, and decisioned quickly … for the most part.

So it’s important that the information being provided is done in such a way that 1) the request for financing can be accurately described and supported, and 2) proper context is quickly achieved so that minimal if any assumptions are needed to form an accurate opinion by the decision makers.

That being said, no matter how well you prepare your business financing application package, there is no guarantee that a reviewer and/or decision maker will fully understand what you’re asking or telling them.  There’s no guarantee that they will even read through everything before forming an opinion on your credit worthiness.

But if you don’t take the time to put the information together properly, the probability of success is going to be lower in terms of getting approved and getting approved for the terms that are acceptable to you.

In the last section when we went through lending criteria and the five C’s of Credit, you likely noticed that the potential things which a lender can assess related to your application is pretty extensive.  And from a lender’s perspective, its not like they always have an exact predetermined list of everything they will pay attention to or zero in on.  But they will certainly pay attention to 1) information you provide, 2) information they find in credit reports, and 3) anything else about your or your business that they find in the public domain.

So while the 5 C’s can be described in fairly specific terms, they can be applied in very broad context to take into account anything that could be potentially relevant to making a financing decision.

This is where relevance, disclosure, and context come in.

 Relevance

This is where you need to step back from yourself and put on a lender’s hat to try and better understand what they might be looking for from you to support your financing request.  Too often business owners don’t take the time to say to themselves, “if I was the lender, how would I look at this?”.   Put another way, let’s say you have a spare $10,000,000 or so, and someone you know asks you for a business loan.  In that situation, what would you want to know about, what questions would you want answered before deciding if you could give them a loan or not?  

The more relevant the information in the loan request the better.

Disclosure

Most lenders will outline a standard information package they would like to receive.  And in most cases, business owners and managers will mechanically assemble the required information and submit it.  While this is certainly disclosure, it can also fall well short of what they should be providing.  There are three parts to proper loan application disclosure … 1) the information requested, 2) information that supports your application that is not requested, and 3) the proactive explanation of information that a lender could find in the public domain about your business that could cause confusion or concern.

An example of a proactive disclosure would be something negative or derogatory on your personal or business credit report that was reported in error and you have the supporting information to confirm the error.

Context

When reviewing all information components that you plan to include in your application package, you should always ask yourself the following questions …

• 1.  Are all items submitted, that were directly or indirectly created from the same information sources, congruent?  Example, do sales, bank deposits, GST reports, bank statements, and accounts receivable balances all reconcile to the source information?  If they don’t, they need to be proactively explained so that incorrect assumptions are not made.
  
  
• 2.  Do any items showing on financial statements need to be explained? Example, are equipment capital lease expenses shown fully as operating expenses or are they broken down into interest cost and depreciation?
  
  
• 3.  Are there any items showing in business bank statements that could cause multiple interpretations. Example, deposits where the source of the deposit is confusing based on the description provided by the bank.
  
  
• 4.  Is the capital request you’re making fully, completely, and accurately described? Example, with the purchase of equipment, the quote provided does not include the terms of sale, the condition of the equipment, or sufficient evidence to determine if the vendor is a dealer or a private seller.

Context is all about providing additional explanation to standardized information sources to make sure that the reader understands 1) what they’re reading, and 2) how it applies to your financing application.

At the beginning of this section when I was going through the application package, I mentioned that lenders run a volume business.  In the process of going through a continual inflow of applications, there will be times when context will not be achieved and bad assumptions that work against your application will be made.

It’s not possible to eliminate the potential for bad assumptions to be made in the first place, but they can be greatly reduced by taking the time to make sure that relevance, disclosure, and context are properly represented in the information provided.  

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