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Time Is Fleeting: Lending Approval Explained

Same-day approval! Get fast funding! Approval in hours! Not so fast; here's what's actually involved.

Ask Google, “How long does it take to get a business loan?” Same-day approval! Get fast funding! Approval in hours!, etc. are just a few of the marketing slogans that pop to the top of the web search page. The truth is those slogans usually are far-fetched. Realistically, the commercial loan process can take a minimum of 45 to 60 days, which means if your business plan requires a loan before the end of the year, it’s time to start the process now.

RIAs often have great plans for growth when they start a new year. However, as the leadership team gets busy those plans get put aside. It happens to all of us. With the fourth quarter looming, it’s time to put those plans back into focus. If those goals involve a cash infusion, it’s time to move the lending process forward. Why? Getting funding involves six steps that take time:

  1. Introspective assessment. Before contacting a lending institution, educate yourself about options for a loan, ask for referrals to lenders based on need and, most importantly, be sure to have your financials in order. Once you locate the right lender, you’ll be asked to provide financial statements dating back two to three years, company tax returns from the last two years, pro forma financial statements and personal financials. The process moves faster if everything is in order.
  1. Shop lenders. Find the right lender by meeting with a few professionals to hear how they work. Ask about their lending steps, the types of loans they process and how they provide ongoing support through the loan term. Be prepared to answer several questions. Lenders need to understand how you’ll use the loan to analyze the potential capacity for repayment. They also want to understand your character and business integrity to paint an accurate picture for a sound partnership.
  1. Understand collateral. This is important to ensure you shop for the right type of lending partner. Lenders make key decisions about the loan by assessing collateral during the process. Traditional business lenders assess property and assets, such as equipment or inventory. RIAs typically have desks, chairs, computers and intangible assets that often don’t add up to secure a business loan. An RIA firm is best served by locating a specialty lender when shopping for a partner. Specialty lenders understand RIA firms have cash flow based on the book of business related to future revenue that can be assessed as collateral. RIA lenders understand the nature of income streams, and their underwriters have full understanding of the risks. This means you can reduce the time it takes to get a loan because you don’t have to explain your business model.
  1. Term sheet. Once you’ve found the right lending partner, you’ll be provided a term sheet, which is another name for a proposal. It will provide an overview of key financial and other terms of a transaction. It sets out the terms by which a lender is willing to lend to a borrower and is used as a basis for drafting a loan agreement. It outlines the type and amount of loan(s) needed for working capital, an acquisition or an earnout.
  1. Five c’s of credit. Underwriters will review your financials to make key decisions related to a loan and its collateral. They’re looking at the capacity of the debit loan your business can sustain, reviewing capital ratios to ensure your business does not become overleveraged and reviewing market conditions related to the loan and factors that could impact repayment. During the process, the lending team also is getting to know you, your leadership team and business model to understand your character.
  2. Business valuation. During the process, lenders may need a business valuation, which they would rely on to determine if a sale would provide sufficient funds to repay the loan in case of default. For larger loan transactions, a third-party business (enterprise) valuation of the agency may be requested.

Here’s the good news. Most loans won’t materially alter what you owe in taxes. Receiving a lump sum in your bank account from a lender isn’t the same as earning money for your business, so that principal amount won’t be taxed. The primary way that your tax responsibilities will change is related to the interest payments you make on your loan. Depending on the type of loan, as well as the legal structure of your business, you generally can deduct your interest payments and lower your tax burden.

Don't be fooled by the advertising copy promising instantaneous results. Each step in this process takes time while the clock inexorably ticks toward the new year. Starting as soon as possible and being prepared with financial documentation in place are keys to getting in under the year-end wire.

Alicia Chandler is president of Indianapolis-based Oak Street Funding, a First Financial Bank company, with customized loan products and services for specialty lines of business, including certified public accountants, registered investment advisors and insurance agents nationwide.

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