Starting a business is exciting. You become your own boss and pursue a dream. Be careful, however, life as an entrepreneur is not easy. You’ll need a lot of help along the way.
Many small businesses apply for loans. It takes a lot of money to start a business, and most entrepreneurs don’t have that kind of capital. Once they start the business, they pay off the loan and focus on making a profit.
You can’t just walk into a bank and expect to be approved for a loan, especially when loan terms are tight. In reality, about 80% of small business owners who apply for a bank loan are turned down.
What separates entrepreneurs who get a loan successfully rest ? Here’s how they do it:
Determine if a loan is necessary
Before you step into a bank, you need to know if your small business really needs a loan. Going into unnecessary debt is like stepping into a hole you can’t get out of. Consider all of your options before making a final decision.
First, take a look at your business budget. You may be able to make cuts or rearrange the funds to cover your costs. Selling a company car can hurt, but it’s better than paying thousands of dollars in interest.
Make a plan
Once you have decided that a loan is your best option, you need to make a plan. How are you going to use the money? How are you going to reimburse it and within what timeframe?
Lenders want to hear thoughtful answers to these questions. “We are looking at how this will improve the business in the long run, as it will only add a current liability,” explains Stan bril, founder and CEO of the MCG commercial credit company. “We’re also looking at the founder’s exit strategy, if he has one, because that’s when we’ll get our loan back.”
Your plan will not only influence the bank in your favor, but also allow you to be successful once the loan is approved. The money loaned must be used wisely and for a specific purpose. Waste the money you have been loaned, and you will have a hard time getting loans later. Worse yet, your company’s reputation and brand will suffer.
Know what banks are looking for
When approving loans, banks look at many different factors. Knowing what they are focusing on will give you an edge when presenting your pitch.
First, a bank will look at your business’ financial statements. “Banks want to know if a business is currently growing,” says Alain crystal, Vice President of Finance at SmartBiz Loans. “They assess the company’s revenue trend by calculating the average revenue growth over time. To limit the risk of default, banks look for revenue growth trends that match (or exceed) the industry average.
Second, if for some reason you are unable to repay the loan in full, the bank will check to see if you have any assets that it can use to recover the lost capital. It will also take into account your business’s credit history and overall expenses, so be prepared.
Lenders want to invest in promising businesses. If your business is struggling to make ends meet, it will be difficult to get approval. You need to show lenders that you have what it takes to be successful and that you recognize the consequences of failure.
Understand the process
Understanding the loan process also gives you a greater chance of success. The more involved you are with the bank, the easier it is for them to work with you. Be prepared with all the necessary documents, numbers and guarantees you may need.
What’s the biggest mistake businesses make when applying for a loan? “Most of the companies that ask us for a loan have no idea how complex the approval process is,” says Bril. “There are a lot of documents required and all the numbers have to match. The warranty is important in the event of a defect.
When in doubt, prepare too much. The last thing you want is to be refused because you ran out of papers. Bring anything that might be useful, it might be useful.
What Happens After You Are Approved For A Small Business Loan? Use it wisely and pay it back quickly. Make sure you stay in touch with your bank: if things don’t go as planned, your lender will be less likely to understand if they feel blinded by bad news.
For entrepreneurs, planning and execution are essential. Small business loans are no exception.