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How Does My Credit Union Evaluate My Business Loan Request?

Five questions that your TDECU Relationship Manager will ask themselves about your loan request can also help you gauge for yourself how your request might be evaluated. Ask yourself these same five questions in order to ‘self-evaluate’ your loan request:

Keep in mind that a lender’s goal in making any loan is to ensure that the loan can be repaid according to the agreed upon terms. The interest rate that you pay on your loan is a function, in part, on the perceived risk the lender sees in your loan request. Therefore, doubt in the lender’s mind about the answers to any one of these questions may cause a delay in us reaching a decision on your loan request.

  1. Can the member show clear evidence that the loan can be repaid through cash generated by the business?
    Your Relationship Manager will attempt to establish a reasonable repayment plan based upon your loan size and purpose, and then look for reliable sources of repayment. The primary source of repayment is always cash generated by the business. Therefore, it is critical that you present financial statements (preferably prepared by an independent accountant or financial advisor) that present both your past and future business revenues, expenses, assets, liabilities (debts) and also cash flow. Be aware that there is a difference between profit and cash flow. For example, you may show ‘non-cash’ expenses on your financial statements, such as depreciation. Items like these may show as expenses on your financial statements, but are not actually cash that your business is required to pay to anyone each month. Therefore, your Relationship Manager will not count these as cash expenses when calculating your business cash flow. Or as another example of matching your loan term to your cash flow, ask yourself this question: Is my business seasonal? If the answer is yes, then the cash flow of your business will likely fluctuate throughout the year, and your Relationship Manager may recommend that your loan contain special repayment terms in order to accommodate your seasonal cash flow. Your accountant and Relationship Manager can assist you in determining if this is needed in your case.

  2. Is the business owner an experienced business person who knows their industry and has the skill to direct the business through tough times as well as good?
    Your experience running your business is very important to your Relationship Manager. We will need to feel comfortable that you (or your key employees or partners) have had sufficient experience dealing with the day-to-day and month-to-month issues involved in running your business, or similar businesses. If your loan request is to start your business, have you had experience managing a similar business?

  3. How much of an investment does the member have at stake in the business?
    The amount of money (or equity) that you have at risk in your business is a way for your Relationship Manager to gauge your level of commitment to the business.

  4. How can the loan be repaid if the business cannot generate sufficient cash flow to repay the loan?
    As the owner of your business, you profit from your business’s success, but you are also the person who ultimately is taking the risk if your business fails. Therefore, your Relationship Manager will want to know that you can provide alternate sources of repayment. The collateral on the loan may be one of these alternate sources, but your Relationship Manager will also want to evaluate your personal financial position, your character and prior repayment history. Personal and business credit reports and personal financial statements are often used to help the Relationship Manager evaluate these factors.

  5. What external conditions exist that may impact the ability of the business to repay the loan?
    In other words, what things may affect your business’s ability to generate sufficient cash flow that may not be in your control? The location and market share of the existing competition (or new competitors that may enter into your market) is usually considered by your Lender prior to approving a loan. A decrease in market demand for your product is another external factor that may or may not be in your complete control. What effect could a downturn in the economy or a shift in consumer preferences have on your business compared to another business? Is your product a ‘necessity’ or a ‘nice-to-have’ product? Can you adapt your product (or product mix) to meet a changing demand?

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