Are you starting a new business? Are you considering applying for a bank loan?
If you’re considering expanding your business, or even buying an existing one, chances are you’ll need to apply for a business bank loan.
Before lending money, banks look for certain things. We’ve highlighted some of the more important ones here to help you succeed in securing a business bank loan.
Plan to Succeed
Before you charge off in applying for a business loan, you’ll need to be organised. You’ll need to collate some fundamental information to increase your chances.
Before submitting your application, make sure you have the following information:
Calculate how much cash you’ll need to start, expand or purchase your business. Consider how much stick you’ll need, what equipment you’ll have to buy and how much working capital you’ll require. A good rule-of-thumb is to ensure you can cover at least one month’s expenses.
Estimate how much you’ll want the bank to lend you. How much will you contribute from your own savings. A good savings track-record will certainly help your application.
Decide if you’ll offer any security. Will you be happy to use your home as collateral?
How long do you need the loan for and how you’ll make repayments. Ideally, repayments should come from the extra revenue or profit you earn from the money you’ve borrowed. Do you have sources to draw upon if you can’t meet a repayment?
Demonstrating you’ve done your homework to the bank will give them some assurance you’re an astute business owner.
Decide How Much To Borrow?
Deciding how much to borrow will vary from one person to the next.
Generally, you should borrow only what you need, including a small buffer for emergencies. You don’t want to submit multiple applications because banks charge administration fees each time.
If you’re buying a business, you may need to explain how much of your own savings you’ll use.
For example: if you’re buying an established business for $120,000, the bank many expect you to invest 20% of your own money.
Alternatively, if you’re buying new equipment, your bank will enquire the value of your existing assets. It would want to know your potential loan to asset value ratio.
Lending $25,000 against assets worth $140,000 is more likely to result in an approval than lending $25,000 against assets worth only $10,000.
As you can imagine, banks want to know that they’ll be paid.
They will often ask for some form of security, such as equipment (for small loans) or your home (for larger loans). You’re likely to have to provide a recent valuation on your home for bigger loans.
Like many business owners, you may borrow funds in the name of a company or trust. If you do, your bank will undoubtedly ask you to personally guarantee the loan.
Servicing The Loan
Banks are not charities. They have shareholders who demand returns on their investment. You’ll need to assure your bank that you have the means to service loan repayments.
Your bank will want to see the following information:
A list of everything you own and what you owe, including your income and expenses. Banks often call these a Personal Statement of Financial Position. You’re probably have to provide your partner’s details as well.
A business plan which outlines your goals, marketing strategies, risk assessments, and much more. It’s highly unlikely a business will lend money without one – especially for new businesses or expansion.
Cash projections for at least twelve months. We’ve written several articles on why cash projections are essential for businesses. It’s essential to show how your business will generate sufficient funds to pay your bills and loan repayments.
How Will You Operate The Business?
If your business hasn’t already covered it, you’ll have to:
Provide details of key personnel, including the business’ owners, management, and key staff. They might even carry out background checks to identify if anyone has poor credit history or has been disqualified as a director of another company.
Describe your experience in running a business. You’ll be expected to include any qualifications you have that relate to your business.
Describe your business structure. If you have a complex trust or company structure, you can expect much greater scrutiny. Money laundering and counter-terrorism legislation forces banks to dig more deeper than they use to.
Explain what professional advice you’ve sought. They’d like to know if you’ve used a chartered accountant to prepare or review your cash projections or personal financial affairs. If you’re buying a business, you’ll need to produce evidence that a solicitor has reviewed any contracts or agreements.