For many businesses, having the ability to successfully obtain funding is a vital step in their development.
After all, a fresh injection of capital can help entrepreneurs secure new client deals, expand offices, and enter new markets, all of which facilitate the scaling of business operations.
While it would be ideal if a business could fund these things using their own finances, the reality is that most simply do not have the spare capital themselves to invest in growth.
However, securing a business loan is not as simple as it may sound. It’s estimated that banks reject around 80% of first-time credit applicants due to factors such as poor credit ratings, insufficient collateral, and a lackluster business plan.
With this in mind, we have created a list of five quickfire tips you can follow to help swing the odds back in your favor and hopefully secure that boost in the capital that your company needs.
Get Ready to Present a Solid Business Plan
Your business plan is by far the most important aspect of the entire application process. If your plan is vague or lacks important details, then the chances are your application will get thrown straight into the trash – or at the very least, it will delay the process by a few weeks.
The whole reason lenders want to see a business plan is that they want to know that you have a viable and sustainable business.
With this in mind, a solid business plan should incorporate several years’ worth of historical revenue and profits (if applicable), as well as sales and profit forecasts for the next three to five years.
In other words, you must demonstrate that you can afford the loan and that you have the financial resources to repay within the agreed time frame.
In addition to this, lenders also want to know what your business does. What products do you offer? What is the current state of the industry and the competitive landscape?
All of this information, and more, are used to gauge the level of risk the lenders will be taking on if they offer you a loan.
Consider All of the Options
As is the case with most things in life, it pays to shop around and wait for the best deal. Far too often, business owners feel a sense of urgency to open up a new line of credit, which leads them to take a sub-par deal that will cost them in the future.
Nowadays, there are many different financing options available to businesses, so make sure you consider them all so you can find the best deal (which is typically the one with the lowest interest).
While traditional banks are still the most popular provider of business loans, it’s worth checking out some of the alternative loan options such as P2P lending, crowdfunding, and maybe even government grants and schemes.
Don’t Be Fooled by Headline Figures
If this is your first time taking out a business loan, proceed with caution. The unfortunate reality of the business loan market is that lenders are very aware of the strong demand for credit facilities at this moment in time.
As a result, it can be hard to find a reasonable interest rate, and sometimes, lenders seduce business owners with an attractive rate, only to hike it after a few months have passed.
Remember, if something seems too good to be true, it probably is. In order to more accurately calculate your business loan, make sure you read all of the terms and conditions before signing on the dotted line and ask the loan provider for a detailed breakdown of all the fees that will be applied to your account.
This isn’t to say that you should avoid taking out a loan with an attractive introductory rate. Just be aware of the total cost of the financial arrangement and make sure you can afford the loan payments when the full rate comes into effect.
Be Honest With Potential Lenders
Always be honest when applying for a loan of any kind. Not only is it unethical to lie or omit information on your application form, but it is also a criminal offense.
With this in mind, do your best to ascertain that all of the figures and financial information within your business plan are correct. There is very little to be gained from hiding the truth, and it is futile to try to second guess the acceptance criteria for any given bank.
In addition to this, if you embellish your financial data and make it seem as though your company is performing better than it is, you will almost definitely be overstretching yourself, which may cause you to miss payments and default your loan in the future if you somehow manage to fool the banks.
Be Prepared to Leverage Your Existing Assets
Last but not least, you should be prepared to leverage your existing assets when seeking a business loan for the first time. Since your business will have little to no history of borrowing, you will be considered a high-risk customer.
In these instances, banks and other lending providers typically take extra precautions to minimize their risk, which usually involves asking borrowers to use their existing assets as collateral on their loans.
Sometimes, leveraging your assets is a smart move regardless of whether or not the bank requires it. This is because it allows you to free up funds that were otherwise locked in existing assets, thus allowing you to improve your cash flow and ramp up operations.
Furthermore, using existing assets as collateral may help reduce your interest rate, which means the total cost of your borrowing will decrease over the full term of the loan.
Of course, you need to be careful that you don’t overstretch and put your company at risk while leveraging your assets.
Conclusion
Try to strike a reasonable balance with your leverage, and seeing as it’s your first loan application, it’s typically advised to err on the side of caution while you build up a respectable credit score.
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