Top Tips to Consider Before Applying for Business Loan : Your business has reached a point where it needs to expand in order to grow its brand. You need money to fund the expansion and the only option is taking out a business loan.
However, as you’ve might have already experienced, banks do not offer loans to fund a business plan. They say it’s against the banking laws, but then, what do the banks look at before they can offer you a loan?
Here’s what you need to arm yourself with when making a loan application.
Startups receive funding from numerous banks. However, they will need assurance that you’ll pay back the loan. One of the ways of reducing risks is through a joint partnership with the government.
The Small Business Administration (SBA), offers to cover a certain percentage of the costs involved, thus allowing the banks to offer loans to startups. Since the government will only pay for a portion of the costs, you’ll have to offer security for the bank to grant you the money.
Security refers to assets which you offer the bank as a way of assuring them that you’ll repay the loan. If you default payment, the bank will move in to repossess the property.
For example, if you have company cars, machines used in the business, or land, you can use them as collateral against the loan.
You can also use inventory in the business as a way of getting an inventory loan. However, banks will only give a percentage of what the inventory is worth. On top of that, they’ll also have to evaluate the inventory to make sure it isn’t obsolete and old.
Collaterals present an alternative way of acquiring loans, but startups rarely have business assets to put up as security. As a result, many business owners resort to using their own assets such as their homes. This is a risky move because should the business fail to take off, the owner could face a possible foreclosure.
A Business Plan
A business plan is a document which contains business goals, the ways in which you intend on achieving them, as well as a time frame. In addition, the plan will also include the business structure. This includes the various roles in the business.
Banks need to see whether you have a scalable plan, which is a roadmap toward greater success. This includes your marketing strategies and financials. A business plan shows organization and a clear picture of where the business is and where it needs to be.
This factor is never too far down the list of requirements. Your character touches on honesty and trustworthiness. If the bank, in any way, feels or finds out you cannot be trusted, then they won’t approve the loan request.
Even with a high-value asset on the table, the bank will not trade this for untrustworthiness. You see, the lender needs to be convinced about the industry knowledge, education, and experience steering the business in the right direction. With a bad reputation, you can forget about the loan.
Banks will be more inclined to approve your loan request if you show commitment to the business. One of the ways banks gauge commitment is by analyzing how much you’ve invested in the business.
Lenders will be more comfortable when they know you have a stake to lose if the business goes under. If you have not invested anything, then the bank will not invest either.
With personal investments in the business, the lender knows you’ll fight to the death to see that the business does not fail. Therefore, they also know you’ll work harder to repay the loan.
All Financial Details of Your Business
This will include documents such as debts and previous loans, your bank accounts, credit card accounts, and investment accounts. More importantly, you will need to include contact information, the business address, and tax ID numbers.
Your Personal Financial Details
This includes details such as your net worth and social security number, as well as details regarding your liabilities and assets such as credit card accounts, vehicles, home and car loans, investment accounts, and mortgages.
If the business has more than one owner, then all owners will be required to present financial statements, especially for those with significant shares in the business. What’s more, you might be asked to sign a personal guarantee.
Information on Insurance
Banks are always out to reduce the risks involved. This is why they’ll ask for insurance details to ensure they have an alternative, should the business suffer any losses. The banks will also take a keen interest in the founders of the business.
These institutions require the owners to take out an insurance policy against their death. This means that in the event of the death of any founder, the bank will take priority in terms of loan payment.
This includes a balance sheet containing all business liabilities, capital, and assets. For this document, the latest one is preferred. In addition, you’ll require a profit and loss statement with a rich history, about three years’ worth.
However, depending on the age of the business, an exception can be made. This is the case if you have assets to act as collateral and if you have a good credit.
For these statements, the banks will prefer if they are audited. This means you have paid a certified public accountant to make sure all details are correct. A Certified Public Accountant (CPA) take auditing seriously because they could get sued if they get it wrong. On top of that, they take formal responsibility for the audit.
On the other hand, if you have your statements reviewed by a CPA, the CPA will take less responsibility for your inaccuracies. Audited or reviewed statements aren’t quite necessary for banks because their primary concern will be how you intend to pay back the loan. This is why they’ll put more focus on the collateral.
Agreements on Future Ratios
Many banks require borrowers to enter into certain agreements whereby the company pledges to maintain some certain ratios.
These ratios include debt to equity, current ratio, and quick ratio. If the company fails to maintain certain thresholds agreed upon, then the company is considered to have defaulted on the loan.
As you can see, there’s quite a lot that banks require before they approve a loan application. This has made it difficult for startups and even established businesses to secure funding from these institutions.
If you fail to convince your bank into giving you a loan, do not despair try to find online lender even with bad credit here :https://nation21loans.com/personal-loans/bad-credit-loans . Instead, look around for other sources of funding that are more lenient. These may include crowdfunding, friends and relatives, venture capitalists, and others.
All Details on Accounts Payable and Receivable
For accounts receivable, this will include details such as payment history, sales, and aging. On the other hand, accounts payable will include more or less similar information as in the accounts receivable. Also, banks will want to know more about suppliers to your business.
The main aim of this is to analyze your payment behavior. If you make on-time payments, your chances of securing a bank loan will be higher.