Most small-business owners need a bank loan at one time or another, and applying for one involves much more than filling out paperwork and saying a prayer. Deciding that your business needs a loan is only the first step. There are a number of things to consider before you approach a lender; a detailed business plan and fully inform the lender about your proposed venture. This information helps the lender to provide you with the right type of finance and advice.How much do you need to borrow; what do you need the money for; what type of loan will you need; how long will you need it for; can the business afford to repay the loan, interest and any one-off or ongoing fees that come with the loan; what security can you offer the lender and how this affects the interest rate offered.
Lenders will look at your businesses risk profile when considering your loan application. Understanding what lenders look for and what they consider risky will help you present your business in a favourable manner.
As a general rule, lenders look for:
- The level and nature of your security (what you’re offering to give them if you can’t repay the loan)
- Your ability to make regular loan repayments (cash flow risk)
- Your ability to ultimately repay the debt (business risk), including any other debts you might already have.
- You need to be able to assess the level of cash flow or business risk in your specific circumstances. A projection of the cash requirements of the business is most important to a lender, as it is the actual cash left after expenses that will repay the loan, not income. It also shows you are an effective manager.
The information provided here will provide you with a range of possible finance options. It is important to seek advice from your accountant or business advisers before approaching a lender for a loan. Remember, people do business with who they know, like, and trust. Lenders work the same way.