Preparation and planning to obtain business loans
Banks usually only approve less than 15% of the loans requested. However, as a small business owner, bank financing is usually the most reliable source. What are some of the actions you can take to prepare for a loan to ensure maximum acceptance potential?
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Alan Haut, ND SBA District Director, advises that before you start writing your application, you need to be clear about four things: (1) How much money is needed? (2) How is the money used? (3) How will the funds be repaid? And (4) what if the company cannot repay the loan?
Tips to get started:
Build and maintain a good credit rating Credibility is number one in what a lender verifies. And your credit rating is a measure of your trustworthiness. What lenders want to know more than anything else is whether they’re going to get their loan repaid, and a credit rating is a measure of their history of paying bills.
Be organized. Get your finances in order and keep all documents (income, expenses, assets and debts) up to date. It is helpful for both the borrower and the potential lender to have all the documents ready when applying instead of having to search for certain documents during the examination period.
Run a cash flow forecast. Once the amount of financing needed is determined, the next step is to determine if you can afford it. As? Through a cash flow forecast. If the amount of cash flow is insufficient, an adjustment to the amount requested may be necessary. The history of the company determines the validity and realism of the forecasts. By doing this exercise before applying, the lender will see that the request is realistic.
Know the type of loan needed. Before applying, an overview of the different types of loans that are available is in order.
Term Loan: This is the classic credit variant. A term loan provides you with a lump sum of cash that you repay (with interest) in regular increments until you have repaid the entirety of the funds borrowed.
Short-term loan: Short-term loans are like term loans, only faster and more expensive. You’ll face higher interest rates and shorter repayment periods, but you’ll have money in the bank very quickly.
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Business Credit Line: A business line of credit is a revolving line of credit that gives you access to working capital. When you use your line of credit, you only pay interest on what you borrowed. Once you have repaid the borrowed funds, you regain access to the capital – no need to re-apply.
Business credit card: A business credit card works in a similar way to a personal credit card. Buy now with your credit card and pay later. It’s a great way to expand your disposable capital and improve your credit score.
Cash Advance for Merchants: Use a merchant cash advance to trade tomorrow’s earnings for cash today. Your lender provides you with a lump sum that you pay back with a percentage of your daily sales.
SBA 7(a) loans: Small Business Administration (SBA) 7(a) loans are one of the most desirable business loans. They have large loan amounts, competitive interest rates, and generous repayment terms. They’re tough to qualify for and notoriously paper-heavy, but they’re the best
Small business financing can be found.
Accounts receivable financing: With accounts receivable financing (also known as factoring), you can exchange your outstanding invoices for cash immediately. If you just need extra cash to cover a burglary or to pay your own bills, factoring might give you all the financing you need.
Keep your business plan up to date. Lenders want to know where the funds are being used and what the overall plan is for the business. They want to know how the loan will help the business and if the management team is able to run the business and pay off the loan. This is the role of the business plan in credit analysis. Not all lenders require business plans, but it’s best to have at least one Business Model Canvas plan (www.strategyzer.com) to show that the company’s direction has been thought ahead.
Contributed by Marc L. Goldberg, Certified Mentor, SCORE Cape Cod & the Islands, www.capecod.score.org, [email protected], 508/775-4884.