It is unfeasible for small and mid-sized businesses to access equity and bond markets for financing due to regulatory hurdles, associated costs, and the time required to secure the funds. Therefore, small and mid-sized enterprises use debt products such as commercial loans and/or lines of credit.
Commercial loans can ultimately be used for any purposes required for the business - acquiring assets, purchasing supplies, meeting daily operational costs, paying payroll, etc. In the loan application process, the business must specify what the commercial loan will be used for.
Depending on the lender, the process to secure a commercial loan may be different. The general process for securing such a loan is as follows:.
The lender (bank) will begin a pre-approval process for the business by evaluating the financial history and income of the business. In addition, the lender will investigate the existing debt of the business and the purpose of the loan. Through a pre-qualifying process, the lender can gain a rough idea of how much the business would be able to borrow and the relative riskiness of the borrower.
After the pre-qualifying process, the business must complete and submit a loan application. In the application, financial statements or similar documents dating back at least three years are generally required. This is to help ensure that the business can repay the loan.
Once the application is submitted, a loan officer will review these due diligence documents. They will investigate things such as credit history, available collateral of the business, the current and projected income of the business, etc. A big part of the diligence process is the financial analysis.
If the loan request is deemed appropriate by the loan officer, a complete and formal credit application is submitted to a credit adjudicator or loan committee. The adjudicator reviews all relevant information and decides whether to approve or decline the loan. The process can take up to a week, and the business may be required to provide additional documentation during the review.
If approved, the processor will present the company with a term sheet. A term sheet is a formal document that outlines the parties involved, the amount of financing, available collateral, fees, use of the loan, and the interest rate on the loan. After reviewing the term sheet and signing a letter of intent, payment may be required for third-party reports, e.g., appraisal reports.
Upon completing third-party reports, the complete loan application package is resubmitted to the loan underwriter for final approval. If approved, the business is required to sign finalized loan documents. Generally, businesses employ a closing agent (e.g., an authorized representative, an attorney, etc.) who handles all closing documents and completes any remaining paperwork.