If you’re planning to start or expand a business you’ll need more than just dreams to make it happen. You need cash, but where do you even begin? Small business loans are not easy to secure especially if yours is a start-up.
Many start-ups do however find the funds that they need. The secret to getting a loan is to prepare well in advance. It’s the only way to ensure that you have the best options for start-up business loans.
Planning for the Loan Application
Before you even approach the bank or lender, a good credit score will serve you well so it’s a good idea to keep the family finances in order to. Not only will this make it easier to secure the loan you’re looking for, but it also plays a part in the interest rate that you will pay. The higher your risk profile, the higher the interest rate.
Your lender will also take account of your debt to income ratio, as this is a good indicator of your ability to service your loan.
Commercial banks have more stringent requirements than private lenders. If you’re having difficulty getting loan approval, it may be time to broaden your horizons and seek funding from a private lender instead. If all else fails you may even consider financing your business using a personal loan.
Here’s how to prepare
Write a Business Plan
A business plan shows that you’ve really thought about the future of your business. A good plan will set clear goals, define your product, the market, and the competition. It will also set out how you plan to attain those goals and in what time frames.
Your business plan should also define long-term growth prospects and indicate clearly to the financier how you will make a return on investment.
A cash flow plan will also serve you well as many businesses fail because they run out of cash. Understand your monthly costs and be sure to include them all from salaries to utilities and rent.
Prepare for the Meeting
Gather together all the paperwork that you’ll need to present to the financier. Aside from your business plan, these should include your tax returns, bank statements, and any business documents that you may already have. If you haven’t registered your business, now’s the time to do it. Include patents, letters of incorporation, insurance, franchises, and business licenses. You may also need proof of collateral.
Some lenders will ask for collateral in the form of assets that secure the loan. The assets may include fixed property, equipment, or stock. Be aware that failure to make repayments will put the collateral assets at risk.
Debt Finance Considerations
Before applying for a loan you must consider the type of finance you require. Reflect on the answers to the following questions.
- How much do you want to borrow? You must be realistic. The bigger the loan the higher the cost of servicing it.
- What will you use the money for? Your lender will want a detailed plan of the proposed investment.
- How and when do you plan to pay the money back? Over what term? How much can you afford in monthly repayments?
- What type of loan will serve you best?
- What will you do if you don’t get the money you need?
Types of Debt Financing
There are several types of debt financing that you can choose from. These include:
- A term loan is a lump sum payment that you’ll have to pay back over the agreed term. This type of loan carries the lowest interest costs and is typically used for longer term costs of expansion.
- A business line of credit is particularly useful for businesses that need additional financing due to seasonal cash flow requirements. This is a revolving credit plan so you draw off what you need and you pay interest only on the amount that you use.
- A business credit card works the same as a personal credit card and is used to pay for operational expenses. The credit limit on a business credit card is usually higher than on a personal credit card and the interest rate is lower.
- Equipment loans are used to buy assets. The assets act as collateral so these are secured loans and hence easier to obtain than an unsecured loan.
- Invoice loans use your accounts receivable as collateral on the finance received.
Approved small business loan application form -DepositPhotos