If you are looking for financing, you need to choose the right loans that will allow you to increase your chances of getting an approval. When applying for a business loan, you need to prepare a detailed business plan and inform the lender about your proposal. That way, the lender can advise you on the right financing option for your circumstances. Here are some useful tips to help you apply and qualify for a business loan.
The first step is deciding whether or not your business needs the loan. Other factors you need to consider before approaching a potential lender include the following.
a) How much money do you need to borrow to meet your business objectives?
b) What type of loan is sufficient enough for your financial requirements?
c) What’s the longest time you need the loan for your business?
d) Can you afford to repay the loan with your business, as well as the interest or any other ongoing fees associated with the loan?
e) What type of security can you offer the lender and how will it affect the overall interest rate for the loan?
1. Loan Access
Here you need to determine how often you can access the funds borrowed through the loan. There are a few options available to you.
a) At Call Loans – These include line of credit or overdrafts. They are available to you whenever you need to access the money. For instance, if you need semi-regular access to assist with your business cash flow or keep your business operating when waiting for customers to make payments, you can access these loans effortlessly.
b) Upfront Loans – These are also referred to as fully a drawn advance. Here, you are provided with the full loan amount. Therefore, you have enough money whenever you need to buy a new business from scratch or buy new equipment for expansion purposes.
2. Choosing The Right Loan Terms
Here, you need to determine the right loan repayment terms that don’t affect the overall flow of your business. With the ‘at call loans’ there are no fixed terms. On the other hand, with the ‘upfront loans’ you need to pay the loan plus interest in regular portions.
The full repayment amount depends on the length or term of the loan. You need to determine the right loan term for your business by calculating how much money you can afford for servicing the loan. Keep in mind that taking a loan with a long term results in more interest during the term of the loan.
3. Total Amount Of Ongoing Funding Required.
This refers to the total amount required for the overdraft or line of credit to be utilized by the business at any one time. For instance, you may have an overdraft limit of $20,000 for the occasional big expenses that come in. However, you will not use more than $5,000 on average. That means that the ongoing funding you need would be $5,000 and not the $20,000.
When applying for the overdraft limit, there are a few things to consider. First, with a high overdraft amount, you will pay more fees. Also, there might be a few clauses in the contract where the lender can force you to repay the entire loan at any time.
4. The Best Interest Repayment Options
What’s better a variable or fixed interest rate? There are a few things that will affect the interest rate such as the repayment stability, the overall cost of repaying the loan as well as the available loan features. However, the choice between the two interest rate options depends on how much business cash flow is present once you have paid all your expenses, including your loans.
However, with a fixed interest rate, the lender bears the risk of any increases or decreases in the interest rate. On the other hand, with a variable rate, you will bear any movement of the interest rate whether up or down. Keep in mind that if your business is not generating too much profit, a variable interest rate will generally increase beyond your repayment capability.
5. Choosing The Right Loan Security
You can choose to have your business loan either secured or unsecured by utilising different types of assets such as rural property, residential, business or commercial property. If you choose an unsecured loan, you should expect a higher interest rate, and the same goes for securing a loan with an asset of lower value. Keep in mind that if you don’t make the loan repayments on time, the lender can seize the asset or property offered as security.
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6. Loan Fees
Any loan is going to come with fees that will make it less attractive. Some of the common loan fees to expect include the following:
a) One off fees including application or establishment fees
b) Discharge or exit fees
c) Fees for early termination
d) Regular fees such as line/credit advances or service fees
Find out the fees associated with the loan before applying for it.
Advice When Applying For A Business Loan
You should seek advice from your business advisers or an accountant before approaching a lender for a loan.
Before approving a loan, lenders will require in-depth financial history about your business so you should have that information readily available. Create a convincing and fully detailed business plan with a profit and loss statement as well as a cash flow forecast.
The lender needs the information from your business plan to assess things such as the past and future plans or objectives, the people working in the business and the market itself.
The Risk Assessment Process
When considering your loan application, banks and other financial lenders will assess any business risk present. They might look for:
a) The nature and level of your security. This is what you are offering to them as a guarantee in the event that you can’t afford to repay the loan.
b) Your cash flow risk which is the ability for you to make regular repayments for the loan.
c) The business risk which is the ability to finally pay the debt including any others you might have.
The lender needs a projection of the cash requirements for the business to determine whether the actual cash left after any expenses can repay the loan and also to ascertain whether or not you’re an effective manager. There are a few things that determine a lender’s perception of risk. These include:
a) Lack of security
b) Lack of business history
c) Start-up businesses that incorporate business, financial and management risk.
d) Industry sector where there might be too much competition, poor profitability profile, barriers to entry and current economic issues.
e) Highly seasonal niches such as agriculture or swimwear where you need to show how to handle cash flow issues on the off-season.
f) Poor credit reports
g) Lack of finance skills, market knowledge and poor planning
If you have a tax debt, you should exercise caution. A lender might not approve the loan if you are currently in a payment arrangement. Therefore, you should discuss the repercussions of such a payment arrangement with your future lenders before getting into one.