If you are a small or medium business owner and are in the process of starting a business, expanding it, or investing in it to be more competitive and efficient, you may need commercial financing to achieve these goals. Here we explain the most common purposes for which commercial financing is offered, the factors that will be evaluated, and the primary documents needed to carry out the process.
The main thing when requesting commercial financing is to be very clear about the purpose of the financing you want to request since it is an essential aspect that the bank will take into consideration.
- The main reasons why financing is granted are:
- To buy a property:
- √ It can be for the owner’s use, such as establishing their offices or warehouse, or
- √ To rent the property for offices, warehouses, or other uses
- To invest in the purchase of:
- √ Equipment or furniture
- √ Inventory
- √ Trademark or patent
- √ A business that is already operating
- Refinancing any commercial property.
- Making improvements to a property that is either business-owned or leased to a third party
- To build a property
Once you know how you will use this financing, you must go to a financial institution to obtain the loan, mortgage, or line of credit. To evaluate your application, the financial institution will take into consideration the following factors for the decision of the credit application (the 5 C’s of credit):
- Character – Your preparation and experience in relation to the type of business you are about to start are evaluated. Your credit history, both personal and for your business, is also examined. That is, an evaluation is made relating to your character as an entrepreneur to project if your business will be stable and grow.
- Payment Capacity – Your company’s cash flow, expenses, and debts are evaluated to assess whether the company has the repayment capacity for the financing you request.
- Capital – Personal and business assets are assessed, that is, the properties and capital you have as an individual and as a company.
- Collateral – Assets or properties offered as collateral for financing. It can be land, property, or cash, among others.
- Conditions – This refers to external factors that will be considered, including competitors in the geographic area of the practice and industry trends.
To process your financing request, the financial institution will ask for a series of documents that will allow them to evaluate all the above mentioned factors. There are several financing products, and according to them or the complexity of the transaction, it will be the type of documentation that the bank will request. Still, in general terms, the documents that could be requested are:
- General documents for commercial credit:
- √ Financial Statements or forms for the last three (3) fiscal years of any legal entity, including affiliates and subsidiaries
- √ Tax returns for the last three (3) fiscal years from all natural persons associated with the financing
- √ 3-year business projections, whether for a new business or expansion
- √ Personal Financial Statement
- √ Interim Financial Statements, if six (6) months of the fiscal year have already passed.
- √ Bank statements of the business for a minimum of six (6) months.
- √ Financial Statements or spreadsheets for the last two (2) years of the ongoing business to be purchased.
Depending on the purpose of the credit, the following additional documents may be requested:
- Credit lines:
- √ Accounts Receivable Report (no more than 30 days from the date it is delivered)
- √ Recent report of construction works not completed or to be completed (“Work on Hand”) / no more than 30 days from the submission date.
- Term Loans:
- √ Purchase agreement or letter of intent (of properties or businesses in progress)
- √ Invoice, purchase orders, or quotes for equipment or improvements
- √ Rental contracts or drafts of these and “Rent Rolls” (Income Producing Properties), that is, a list of the properties that produce income for the company.
Another important factor when applying for commercial financing is knowing the various financing products in the market. We will be explaining this topic soon, so stay tuned!
If you need help or guidance with any financial aspect of your business, at Oriental we are more than ready to serve you, you can access orientalbank.com.
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Credit products are subject to credit approval. Certain terms and conditions apply.
