3 Tips On How To Get A Business Loan
Most business owners, whether just stating out or well established are very good at what they do in the industry in which they operate.
But, when it comes to financing their business, they tend to panic a bit. Not because it is hard or daunting but because it is unknown.
Most businesses do not have to constantly seek outside business capital which is usually a very periodic event. Further business owners, when seeking capital, can sometimes be awash with a lot of stress and emotion as most businesses dont seek capital until they really, really need it.
However, applying for and receiving a business loan is no different than many of the other tasks that a business owner has to complete each and every day.
Most business owners have to negotiate with suppliers, vendors and landlords and meet their demands or requirements or deal with the demands and needs of customers selling them on what is best for both parties.
Getting a bank loan is no different and if you have the skills to win over customers and suppliers, then you already have the skills needed to secure your business loan.
Three tips on how to get a business loan:
1) Understand Your Needs:
What you need the loan funds for is as important as the amount of your business loan. The reason is that there are different loan products for different needs. Each product is designed to minimize the risks to both parties (the borrower and the lender).
If you are seeking a $100,000 to purchase equipment, you would not want a short-term loan that you have to pay back in 3 months. The monthly payment would just be too high and unaffordable. Or, if you are purchasing commercial property, you would not want an unsecured loan rate of say 12% as you would end up repaying 4 or 5 times the original amount over the life of the loan.
When seeking working capital look for business loans that are designed for working capital to give your business the time it needs to convert current assets into cash and repay the loan as soon as possible. Anything else or a longer time for repayment is just costing your business unnecessary interest costs.
When looking to purchase fixed assets look for fixed asset loans with longer terms and lower interest rates to make the payments more affordable and give your business time to deploy those assets to generate enough revenue to pay for themselves.
2) Understand Your Lenders Needs:
Banks and other lenders have their own policies about who they loan to, what they loan against and what criteria they require.
It is no different then the policies you have in your business.
You first have to understand what the lenders policies are. If they require you be in business for three years, that your business is profitable and that all owners have FICO credit scores above 700 then that is their policies and no amount of begging or your individual needs is going to change that.
Banks and lenders, just like your business, want to get paid. Lending money is their business and they have to ensure that they get their money back plus interest and fees (their revenue).
You would not accept a customer who says that they will kindly pay you on Tuesday if you give them your product or service today unless you qualify them and their ability to pay for those goods.
Makes better business sense to say no then take unnecessary risk and not get paid for what you provide.
Some items that banks or other lenders look for:
a. Credit. Credit shows that you have paid your other obligations in the past. If you have walked away from other agreements, lenders will think that you will walk away from them.
b. Cash Flow. Can you make the loan payments? This is not based on how much money you think you will make after the loan is funded but how much you are making now and how much you have made over a similar period in the past.
If you made enough over the last 3 years to pay the loan then you should make enough in the next three years to repay a loan.
c. Collateral. Most lenders want a backup for payment should your business fall on hard times. This either means the asset you are purchasing or all the assets of your business. Again, banks just want to get repaid. This is also why they require personal guarantees. 1) It stops borrowers from easily walking away and 2) it is another means to payment should your business default.
Instead of whining about all these criteria and thinking it is not fair (some of your customers might think your policies or prices are unfair); understand what is required and work to get your business and personal situation set to meet it. Thus, if your lender requires a low debt-to-income ratio and 1.5X cash flow then work at your business to meet those requirements.
3) Take The Emotions Out Of It:
Many business owners are so confident in themselves and their business idea that they dont understand when others (especially bankers) dont get it.
Thus, you have to approach a bank loan with logic (based on the points above) and not emotion or desperation. The reason is that your lenders will pick up on this and perceive you to be even more risky then what you show on paper.
If you approach your business loan logically and show it logically then your banker or lender will consider your deal logically. Add in emotion and you are bound to fail in your request.
Lenders just want to get repaid and set their policies and requirement to ensure that happens more times then not. Thus, if you want a business loan, it is you that has to work to meet those requirements and not expect your lender to just cave in because you think you have the next best business idea.
by: Business Money Today
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