Ask the Expert
Before the Paperwork
Prep work a must prior to completing a loan application
The process of securing a loan starts long before you begin the paperwork or meet with a bank. Michael Cheravitch, Senior Vice President and Director of Business Banking at FirstMerit Bank, shares what should be considered before stepping into a lender’s office.
What should a potential borrower do before applying for a personal loan?
MC: Having the following information readily available will help make the application process quick and easy. Potential borrowers should make sure they have current personal financial information that outlines their income, obligations and assets. This includes sources of income, current employer’s name and address, gross monthly income, years with employer and position/title. Much of this information can be found on recent paystubs, W-2s or the most recent year’s tax return.
Borrowers need to be able to articulate the purpose of the request – i.e., what they’re going to use the money for. They should also be prepared to discuss what collateral they’ll use to secure the loan and have an idea of how they’ll pay it back – i.e., with only their income or in combination with a co-borrower’s, how long a term they desire or what payment amount they think they can afford. Knowing this information will also help determine the type of loan they wish to secure.
It is also important for potential borrowers to know their obligations as guarantor or co-borrower. For example, co-signing on someone else’s car loan is counted as part of their debt obligations.
What should a potential borrower have prepared before applying for a business loan?
MC: Business owners should provide a current personal financial statement, verification of liquidity (the same bank statements and verification of income as for a personal loan), at least two years of personal and business tax returns and a current interim business financial statement (balance sheet and income statement).
In addition, business owners should bring a current accounts receivable and accounts payable aging listing, as well as a detailed debt schedule that shows any other creditors and the details of the debt (balance, monthly payment and rate). Business owners should also be prepared to discuss any credit issues they have on their personal history and the steps they have taken to correct these issues.
Business owners need to be able to explain what the loan will be used for and what collateral will be provided to secure the loan. It is imperative that a business owner be able to paint the picture to a lender of what their company does (what products or services they offer), who they sell to and how long they have been in business. They should be able to explain details of their financial statements, how they will maintain a level of sales and profitability, and what opportunities they have to expand/grow the company. Essentially, a business owner needs to be the advocate for the business and know it inside and out and be prepared to answer questions about every aspect of the business.
How far in advance should someone meet with a lender?
MC: Potential borrowers should apply as soon as they know they have a need for the money, whether that need is immediate or not. Typically, a line of credit or term loan takes one to two weeks to process, so potential borrowers should apply a minimum of 30 days before they need it. With real estate loans, they should apply at least 60 days before they need to close because there is usually more work to do after the loan is approved, such as appraisals and title work that can take some time to complete in order to close the loan and provide funds to the borrower.
Items to bring in preparation for applying for a loan: