Borrowers generally start the loan process by contacting their bank, but unfortunately, it is difficult to secure business loans from most banks.
By: Hitesh Khan/
If you want to secure business loans, you should know that banks:
- Contain the most stringent requirements,
- Impose the most loan covenants,
- Take the longest time to secure the loan.
Bank loans go through several phases of review. First, they will look at your historical income statements, balance sheets and statements of cash flow. Then they will review several years of tax returns on the borrower and all owners who will guarantee the loan.
Generally it takes several weeks before the borrower can get a verbal or written commitment letter from a bank. If the bank is non-committal, the business will then have to start the process to secure business loans all over with a new lender.
If a firm has very good credit rating, a good relationship with its bank, a solid and confirmable history of earnings and profits, and is not in a hurry, banks will probably give them the lowest stated interest rate on the loan.
If you need to be pre-qualified quickly, you should look at non-bank sources of funds first. Once you secure a commitment from a direct lender, then you may start a parallel process with your bank. Some direct non-bank lenders can give you a verbal commitment in a few days, but keep in mind that you are only searching for “commercial” loans-offers, so you will need to screen your searches.
To secure business loans, keep in mind the parameters of the terms you will accept:
- Will you take a balloon loan?
- What about a covenant or condition on the loan?
If you know that your profit and loss statements are not provable and solid, or you do not have a high credit score, applying at banks is generally a waste of time. Instead, go directly to non-bank commercial lenders to secure business loans quickly.
Many borrowers are not aware that much more may be required after you secure business loans, than simply making regular monthly payments on time.
Some lenders may ask you to provide quarterly or annual income statements, balance sheets and tax returns. Some loans will require covenants-promises that your business will meet certain tests in the future. They may require a certain positive cash flow, or a certain debt-to-cash-flow ratio, or other financial criteria. During a downturn in your industry or the economy, your business may face temporary cash flow or profit shortages.
If your business falls short of the terms and conditions contained in the loan covenants, your bank may deem that your loan has entered into default. Default triggers numerous penalties. It may require that you pay back the loan immediately.
This can cause you to have to find another lender to secure business loans very quickly.
Different lenders require different conditions, so ask the lender up front what conditions or covenants apply. Some non-bank loans charge a slightly higher interest rate but will waive all covenants and conditions except for timely repayment of the loan. If you feel that your business cash flow is uncertain, you might want to consider these non-bank loans first.
If losing your business or property to the bank is likely because of the financial test requirements, then find another lender.
Another important question to address be you secure business loans is, “what kind of documentation will be required?” Traditional lenders require 3-5 years of financial statements, income tax returns, and other documentation. This may include:
- Asset statements,
- Original incorporation documents, and
- Personal financial records of the business owners.
Keep in mind that many small businesses do not have the level of income documentation some lenders require. If you ask ahead of time, it will save you numerous headaches from delays or rejected loan applications. The documentation required and the timelines for approval are related-the more information required, the slower the loan approval and funding process.
If your business booms, you may want to repay the loan early but many business loans usually have pre-payment penalties. But whatever it is, businesses owners ought to remember that you need to borrow when you do not need money. When your business is struggling and you need additional funding to tide over a tough patch, then you will find that your access to funding is completely cut off and end up with very expensive funding.
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