When financial crisis comes knocking, many entrepreneurs would consider approaching lenders and different financing sources.
By: Hitesh Khan/
Many businesses tend to undergo certain financial constraints in the course of their development most of the times. When such times come knocking, many entrepreneurs consider approaching lenders and alternative sources of financing.
Business loans are fundamentally pretty similar to personal loans with a few small caveats. How a business structures its debt and manages its cash flow can be the difference between a successful business and one that ultimately fails.
Many new business owners make the mistake of taking out too many loans too quickly instead of exploring other means of structuring their business or securing financing. While business loans can be used at any point during a business’s life, it’s always better if you can minimise the amount of loans you have to take out until your business’s cash flow and customer base is well established.
If payments on the business loans you took becomes due before the business begins producing sufficient revenue to cover them, it can put serious pressure on the business’ cash flow. So, before you start signing documents on business loans, consider several alternatives, and operate on a shoestring budget.
There are several lenders ranging from banks, non-bank finance institutions as well as different financing sources such as crowdfunding sites available to the entire business industry.
However, not all businesses are able to access business loans. This is because of several factors that many lenders put into consideration. Unfortunately, not many businesses meet all the requirements that financial institutions need in order to grant them business loans or lines of credit. On the same note, some business owners do not know factors used to determine the business creditworthiness. Here is a look at what lenders look for before extending any form of credit to a small business entrepreneur.
For a small business to get off the ground, or to keep one operating, it must have financing which is often in the form of a business loan. One form of small business financing is debt financing. Small businesses can apply to banks or other financial institutions, like credit co-operatives, for commercial loans. Usually, banks do not make loans to start-ups, but they do make loans to ongoing businesses. These are the major steps you should follow through the loan application process.
It seems obvious that a small business owner would know the reason for and amount of the business loan they need. If the business is a start-up, this is not necessarily true. Owners of start-ups may only be in the process of determining the number of funds they need and why.
Business owners, whether the firms are start-ups or existing firms, need to take some time and be able to articulate why they need a business loan and how much they need. Often, businesses may not be able to address the question of how much they need until they prepare their financial statements as part of their business plan.
When reviewing your borrowing options, look at the commercial banks available to you. Don’t just go to the large, international commercial banks. You may have a better chance for a loan at the smaller credit co-operatives.
Different financing sources like licensed moneylenders might be another option for you.
If you are a member of a local credit co-operative, talk to the loan officer there about your need for a small business loan. If they make such loans, pick up a loan application there as well. There are different financing sources, such as micro loans that make loans to startups. If one lender turns you down, another may say yes to the same loan application, so keep trying.
Preparing business plan may be your most important step. In order to get a small business loan from just about any lender, you have to prepare a good business plan. In fact, until you have a good business plan, chances are you won’t even know how much money you need or how fast you can repay it. The business plan is in addition to the loan application required by the financial institution.
Business plans consist of many parts. A good business plan will have several years of past and project financial statements for your business. It will include a statement of collateral or the type and value of assets you will use to secure the loan. You will need to include an analysis of the market your business will serve as well as a statement of your own experience.
In order for the loan officer at your financial institution to give your application for a small business loan a second look, you have to make it compelling with your presentation. Prepare a presentation of your business plan and application for your loan officer.
Whether your presentation is to a bank or to a different financing sources, put together a professional package to hand to your loan officer with a narrative plus any financial statements, spreadsheets, charts, and graphs necessary.
Be sure and include an Executive Summary. Many loan officers read the Executive Summary first and decide whether they are interested based on that. Make an appointment with your loan officer and request enough time to do a short presentation, with visual aids, based on your business plan. Be concise, succinct, and organised.
If your business is expanding and you are searching for different financing sources, it is a good idea to talk to loan consultants. Loan consultants can set you up on a path that can get you a it in a quick and seamless manner, as they have close links with the best lenders in town. They can help you compare various loans and settle for a package that best suits your needs.