Marc L. Goldberg
Banks generally approve less than 15% of loans sought. However, as a small business owner, bank financing is usually the most reliable source. What are some of the steps you can take to prepare for a loan to ensure maximum acceptance potential?
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Alan Haut, ND SBA District Director advises, before you start writing your proposal, there are four things you need to be able to clearly address: (1) how much money is needed? (2) how will the money be used? (3) how will funds be refunded? And (4) what if the business is unable to repay the loan?
Tips for getting started:
Build and maintain a good credit rating Credibility is number one in what a lender will consider. And, your credit rating is a measure of your reliability. What lenders want to know more than anything else is that they will get their loan repaid and a credit score is a measure of bill payment history.
Be organized. Get your finances in order and update all your documents (income, expenses, assets and debts). It is useful for both the borrower and the potential lender to have all your documents ready when the application is submitted rather than having to search for specific documents during the assessment period.
Run a cash flow forecast. Once the amount of financing needed has been determined, the next step is to determine if you can afford it. How? By making a cash flow forecast. If the cash flow amount is not sufficient, an adjustment to the requested amount may be required. The company’s past history will determine the validity and realism of the projections. By doing this exercise before applying, the lender will see that there is realism in the application.
Know the type of loan needed. Before applying, a review of the different types of loans available is in order.
Term loan: This is the classic loan option. A term loan provides you with a lump sum of cash that you will repay (with interest) in regular installments until you have repaid all of the borrowed funds.
Short term loan: Short-term loans are like term loans, just faster and more expensive. You will face higher interest rates and shorter repayment terms, but you will get money in the bank very quickly.
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Business line of credit: A commercial line of credit is a revolving line of credit that gives you access to permanent capital. When you use your line of credit, you only pay interest on the portion borrowed. Once you’ve repaid the borrowed funds, you have access to the capital again – no need to reapply.
Corporate credit card: A business credit card works much the same as a personal credit card. Use your credit card to buy now, pay later. It’s a great way to increase your available capital and boost your credit score.
Merchant Cash Advance: Use a merchant cash advance to exchange tomorrow’s income for cash today. Your lender will give you a lump sum of money which you will repay with a percentage of your daily sales.
SBA 7(a) loan: Small Business Administration (SBA) 7(a) loans are one of the most sought-after business loans. They have large loan amounts, competitive interest rates, and generous repayment terms. They’re hard to qualify and notoriously heavy on paperwork, but they’re the best
Financing that small businesses can find.
Financing of accounts receivable: Accounts Receivable Financing (also known as factoring) allows you to exchange your unpaid invoices for cash immediately. If you just need extra cash to cover a crisis or pay your own bills, factoring can provide you with all the financing you need.
Keep your business plan up to date. Lenders want to know where the funds will be used and what the overall business plan is. They want to know how the loan will help the business and that the management team has the capacity to run the business and repay the loan. This is the role of the business plan in loan analysis. Not all lenders require business plans, but it is best to have at least a Business Model Canvas plan (www.strategyzer.com) to show that the direction of the business has been well thought out.
Contributed by Marc L. Goldberg, Certified Mentor, SCORE Cape Cod & the Islands, www.capecod.score.org, [email protected], 508/775-4884.