Business loan approval = Cash available? True or false

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And this is one of the most important things entrepreneurs realize when they get their first business financing. 

It makes sense that this would be surprising, because, in general, for personal loans, once approved, the borrower quickly has access to the money.

The business financing process is more like a mortgage loan that involves a number of stakeholders (appraiser, notary, insurer, broker) and many documents to establish not only the value of the building but also your ability to repay the loan. These efforts establish the lender’s risk, although the building is collateral on a first-rank mortgage on real property. In financial jargon, it is a low-risk loan, which explains the low mortgage interest rates.

In business financing, the risk is much greater because what is being financed is the potential of the new project or new business. As such, risk is evaluated based on the idea, the entrepreneur’s situation, and documents such as the business plan, which includes assumptions and financial forecasts. 

Plus, a business’s collateral is often more volatile and less tangible than for a building. In general, it is equipment, inventory, raw materials, furniture, etc. The resale value, in the event of non-payment, is a lot less stable than for the building itself.

As such, to obtain access to funds following business financing, it is not enough to sign the loan contract and other documents provided by the lender.

This is why entrepreneurs need to prepare for their efforts to obtain a loan to ensure they get their money as soon as possible (disbursement) after approval.

5 things to know and do to avoid nasty surprises and delays in the disbursal of your business loan:
1- Capital outlay

The capital outlay is the money you personally invest in the project you want to have financed. This is generally 5% to 40% of the cost of the project.

Proof of capital outlay is often the most problematic factor when disbursing a business loan.

Requirements will vary depending on the partner you are doing business with. For example, financial institutions generally have access to your personal financial information, which allows them to directly verify your capital outlay. But if you do business with another type of lender, such as economic development organizations or an angel investor, you have to provide proof of your capital outlay.

Something to consider:

Most of the time, new business financing requires an injection of funds by entrepreneurs.

What to do

There are two methods to show the capital outlay:

The simplest method:

Provide your personal bank statement that shows the amount of the capital outlay and its withdrawal, as well as the business bank account showing the amount was deposited.

Documentation + Organization + Time+++ = More involved as a method

If you have made expenditures for your project from personal funds, expect to provide your lender with a lot of documents. You will probably have to produce a file with expenses, combined with original bills and your personal and business bank statements that prove that the amounts have not been reimbursed by the business.

Some lenders will reject this type of proof because it requires a great deal of verification time for them.

A caveat

Regardless of the method used, proof of the capital outlay must show that the entrepreneur’s contribution is recent, i.e., within six months of the loan application.

2- Life insurance for the entrepreneur

In most cases of business financing, lenders will ask that you take out life insurance for each entrepreneur to cover the balance of the loan, for the loan’s term.

The reason is simple. Ensuring that your business and estate are free of debt in the event of your death increases the probability of the business’s survival and the security of your heirs.

What to do

  • Once you think you are going to apply for a business loan, you need to begin efforts to obtain life insurance based on the amount of the loan you want. The higher the amount, the longer the efforts, such as medical exams and multiple checks by insurers.
  • You need to inform the insurer that once financing is approved, the lender must be indicated on the insurance policy as a secured creditor so that the loan balance is reimbursed directly to them in case of death.
  • N.B.: The requirement is to have the insurance contract, i.e., the document that shows that the insurance is in effect.
3- Disability insurance for the entrepreneur

Depending on your business model, if you are a solo entrepreneur or a self-employed worker, or an entrepreneur who is hard to replace to ensure the survival of the business in case of accident or illness, disability insurance may be required to ensure monthly payments are made on the loan.

As an entrepreneur, disability insurance is a wise option to protect you in case of health problems and avoid financial worries, both for you and the business.

Tip: Plan to ask for an additional amount to insure your personal expenses in case the business can’t pay your salary during your leave.

What to do

  • From the beginning of your efforts with lenders, meet their requirements.
  • If this is a requirement, inform the insurer that you are seeking business financing and that as soon as the loan is approved, the lender will have to be identified on the insurance policy as a secured creditor or collateral assignee for the amount and term of the loan.
  • Once again, don’t wait to start the process, because it can take time to obtain approval from insurers.
4- Commercial insurance for the business

Commercial insurance has to cover goods (equipment, furniture, inventory, etc.), the building or the premises in case of loss, damage, or theft. It should also offer at least $2 million in civil liability protection. This coverage protects the business in case of injury to someone or damage to someone’s property (suppliers, clients, passers-by, etc.).

For businesses already in operation, be sure to increase the value of your commercial insurance policy based on the cost of your new project.

What to do

  • Don’t be caught off guard: some sectors of activity are more difficult to insure.
  • Approach insurers at the start of your business efforts to get an idea of the real costs and potential obstacles for your business.

N.B.: Your lender will ask to be added as a secured creditor to your commercial insurance.

5- Provide valid, signed documents

Here is a non-exhaustive list of the most important documents:

  • Lease or property deed.
  • Certificate and articles of incorporation and bylaws for incorporated businesses.
  • Contract for other financing included in the financial arrangement.
  • Shareholders’ agreement.
  • Commercial agreements (for example: contractor doing renovations or equipment or raw materials suppliers).
  • Permit required for the business’s operations (certificate of occupancy from the municipality or the city, MAPAQ, etc.).

What to do

  • From the start of your business project, create a filing system (paper and digital) to stay organized.
  • Create a file, ideally digital, to group all documents required to obtain financing and have it disbursed.
  • Don’t wait until the last minute to find documents and ensure their compliance (contract in effect, signature, complete document with all pages, etc.). If the lender has to follow up with you two, three, or four times to obtain the right documents, the disbursement will take longer.
  • Ask the lender for a list of documents required for disbursement.

N.B.: Depending on the financial partners and the nature of the business project, there will likely be additional requirements.

In conclusion:

Signing your business loan contract is a step in the financing process and not the end of it. First, you have to provide the required documents to obtain the disbursement of the loan to your bank account. If the lender has to follow up with you two, three, or four times to get the right documents, you can expect disbursement delays.

Second, through the term of your loan, you must provide your financial statements quarterly and annually and be available for follow-up or guidance from the lender.

Being informed and prepared to make a loan application makes you more credible to the lender and enables you to get your money as soon as possible. 

Remember that you are asking for a large amount; put the odds in your favour to ensure your business project is realized and endures.