You Should Do These Before Applying for a Business Loan

Ola always finds it daunting securing a business loan for his early-stage venture. He was even more disappointed when he first set out to get a loan but couldn’t secure more than ₦ 500, 000 that he ended up having to sign a lien on his family home to get one.

To his amazement, after presenting the bank with some receivables, the bank still asked for personal guarantees not considering the fact his business was a corporation. Why does he still need personal guarantees?

One of the first things overly-optimistic entrepreneurs discover as they look for funding is that banks don’t fund enterprises with business plans alone. Apparently, in their defence, it would be against banking law if they did. Banks are dealing with depositors’ money so they wouldn’t want to invest in a startup they can’t effortlessly get their money from.

Lenders are going to require a lot before granting your loan application, so what are these things you need to secure a business loan?

Draft a business plan

The first thing you will need to do if you want to convince a lender to give you a loan is to write a business plan. Lenders will want to know that you are running a credible and profitable business and that you have the knowledge and skills required to grow your business into stardom.

Your business plan has to include absolutely everything that has to do with your business– your goals, competitors, past and projected revenue and expenses, market analysis, and how you intend to grow the company.  Additionally, the plan has to show why you are the best person for the job, and when you have completed all of that, write an executive summary that will draw the lender into your vision.

This will be the first thing they read, and it could be the last if they are not immediately interested.

Research your borrowing options

In order to find the bank or lender that will offer you the best deal, you will have to do a lot of research. Don’t opt for large banks that seem to have great offers before you look into smaller banks and credit unions.

These small banks may give you a better chance of getting approved. However, you may get turned down, but keep trying. If you continue to adjust your plans and research all of your options, you are sure to find a lender who will be willing to give you the loan you need.

Secure a collateral plan

Apparently, not all banks lend money to startups without a guarantee they are getting their money back. Some loans will require you to put down some sort of collateral. If this is the type of loan you choose, you will need to have a good idea of how much your form of collateral is worth. Lenders will want to know this number and you will want to know that you have something of tangible value to secure the loan.

So your business has to have physical assets it can pledge to back up a business loan. Banks look very carefully at these assets to make sure they reduce the risk. The need for collateral also means that most small business owners have to pledge personal assets, usually house equity, to get a loan. Just make sure you’re not going to default on the loan and lose whatever property you use.

Clearly, state the purpose and amount of the loan

When you have completed the financial statements and your business plan, you should have a clear idea of what you want to accomplish with the loan and how much you will need to reach your goals.

If you are able to clearly state your goals on paper and in person, it will be easier to explain exactly what you need to lenders. Identify what pieces of equipment you will need, the marketing strategy you will implement, or whatever else you will buy with this loan, and research the best price for each of these items. Show this research to the lender so they see that you are taking this seriously and you aren’t trying to take the easy route.

Prepare all of your business’s financial details

This includes all current and past loans and debts incurred, all bank accounts, investment accounts, credit card accounts, and of course, supporting information including tax ID numbers, addresses, and complete contact information.

Prepare a balance sheet that lists all your business assets, liabilities and capital, and the latest balance sheet is the most important. Your Profit and Loss statements should normally go back at least three years, but exceptions can be made, occasionally, if you don’t have enough history, but you do have good credit and assets to pledge as collateral. You’ll also have to supply as much profit and loss history as you have, up to three years back.

Prepare all of your personal financial details

This includes social security numbers, net worth, details on assets and liabilities such as your home, vehicles, investment accounts, credit card accounts, auto loans, and mortgages.

For businesses with multiple owners or partnerships, the bank will want financial statements from all of the owners who have significant shares.

Have an insurance plan

Since it’s all about reducing the risks, banks will often ask newer businesses that depend on the key founders to take out insurance against the deaths of one or more of the founders. And the fine print can direct the payout on death to go to the bank first, to pay off the loan.

We are positive if you do all or most of these, your loan application can never go wrong.

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