How to Convince Lenders to Approve Construction Working Capital Loans

Despite the easing of the recession, banks are sometimes not amenable to granting loan applications. In fact, the approval rate for small business loans dropped from 20.6% in September 2014 to 20.4% in October.

In any case, what that means is almost 80% of small business loan applications are rejected.

So what should you do? There’s always the option of alternative financing, of course. But if you’re determined to get a loan from a bank, what you need to do to increase your chances of approval is to be prepared.

Prepare the Minimum Requirements Beforehand

Different lenders have different requirements, but it will help your cause if you already have the following paperwork with you when you ask for a construction working capital loan:

  • A summary on how you plan to use the loan and the impact to the income statement
  • Your tax returns or year-end financials prepared by your accountant
  • Your current year to date financial statement

These three steps are paramount. You can’t hope to boost your chances if you don’t even have this ready right away.

Furnish Additional Details

Now if you really want to go all out and impress the bank officials, you should offer the following info as well:

  • Account analysis bank statements for the last two months, which includes the deposit history
  • Any details of any business succession plan
  • Personal financial statements on all the important owners (more than 20% ownership) of your construction company
  • A summary of the ownership percentages
  • An organizational chart of your company, along a short bio of the top echelon leadership
  • An internally generated current financial, along with a comparison with the previous year to date financial statement
  • Prior 4 year-end tax returns or financial statements prepared by your accountant
  • An expansion of the summary on loan use, with additional documents such as invoices, contracts, budgets, and other documentation

Answering the Crucial Questions

Before a bank gives final approval for a working capital loan, they really want to make sure that they will get their investment back. That’s the reason for all the paperwork. These documents give the bank a clearer idea of how likely it is that they’ll get their money back plus interest.

So the first question they will want answered is if you will have working capital in the near future (such as payments from late-paying clients or guaranteed contracts) to meet the payment schedule. It will make these bank officials feel better if you can assure and prove that you will have the money needed to pay your monthly obligations with them.

The next question is whether you have an additional source of funding. This is where collateral (such as your equipment) or your personal guarantees come in. If the money coming to the company won’t be enough to service the debt, then you better make sure that you have an ace up your sleeve.

Banks want to lower their risks, which is the primary reason for the paltry 20.4% small business loan approval rate. Make them feel secure in doing business with you, and you will get your construction working capital loan.