“It takes money to make money.”
Nowhere is this saying truer than when it comes to businesses. Businesses need money to start, grow and expand and they often need to shell out money first in order to make money, a stage where they turn to banks for help. Research suggests that 59% of business owners turn to banks for financing but only 27% get financing there, something that makes you wonder why less are approved for business loans. Marc Scheipe, chief financial officer of Sage North America, says that business owners may want to spend more time preparing their companies for a business loan because preparation can make all the difference in whether a company receives the loan they applied for. Prepared businesses have better chances of gaining loan approvals.
How do you prepare your company for a business loan? Read the five tips we listed below:
1. Have a detailed business plan.
Majority of business loan applications require documentation of a business plan – your company, product, target market, team, and financials. Provide as many details as possible such as how you will use the funds you will be acquiring from your loan application and how much you need to accomplish your goals.
2. Prepare to share all financial information.
Provide possible lenders with a detailed financial background of your company, this includes all current and past loans, incurred debts, all bank and investment accounts, credit card accounts and supporting documents like tax ID numbers.
Be prepared to also give complete details on your accounts receivable, accounts payable, and complete audited financial statements. This will allow the lender to look through your financial history particularly profit and loss and your current cash flow. Good cash flow assures the bank that you’ll be able to pay back the loan you are applying for. They are also looking for evidence that you can afford to pay back what you borrow when you’ve covered business operation expenses like rent, salary, etc. If you are a small business that hasn’t been consistent in keeping your financial books up-to-date, now is a good time to think about accounting outsourcing for this task to a qualified provider.
Depending on the situation, banks might also request for your personal financial information so it is a good idea to be prepared on this aspect as well.
3. Know your credit score.
A credit score is a three-digit number calculated from reports generated by financial institutions that determine your credit worthiness for a loan, mortgage or credit card. It affects whether or not you are approved as well as what interest rate you are charged.
There are financial institutions that can help you determine your credit score and advise how you can increase your score. If your credit score is low, there is still time to correct it and have it acceptable in time for your loan application.
4. Have capital.
Most business owners misunderstand this concept saying if they had capital, they wouldn’t be applying for a loan in the first place. Financial advisers explain that banks want to make sure borrowers have more investment in the business so it will make it harder for them to just walk away when the “going gets tough”, so to speak. Having some cash on hand also gives the impression that the loan you are applying for isn’t a last effort to keep your company alive for the next few months while your business continues to go down.
5. Be prepared to draw up collateral.
Lenders need to feel secure that the money they are lending will be paid back so they often require collateral as assurance. Collateral are assets that can be an alternative to paying back business loans such as property, equipment, stock or others. It’s usually easier to secure a loan if you are able to offer collateral as security especially if you have a new business venture that doesn’t offer much history as a way to offer loan security.
These tips are all about context of course. Banks will still consider how you plan to use the loan, the state of the industry your business is in and overall economic conditions. Preparing for a business loan is just the first step. Finding ways to mitigate any weaknesses or risks that might deter you from gaining loan approval is what ultimately gets you financing.