In the last instalment of this Startup Strategy Series, we covered how external business funding can be important for a budding business and how a budding entrepreneur can prepare his business to get approval for such external business funding. Our previous post revolved around the right way to write a business plan, cash flow projections, an exit strategy, and a personal survival budget.
While this takes care of the documentation side of things, there are many other variable you’ll need to consider to get a business loan approved for your business. In this post, we’ll try to cover as many of these intangibles and tangibles as possible so as to help you get a business loan in the least harrowing manner.
Understand Your Requirements
If you’ve written a business plan along with all the associated documents along with the relevant calculations, then you will already have a vague understanding of your requirements. However, it would be prudent for you to revisit your calculations in a more refined and intrusive manner before actually submitting any kind of a proposal or application.
However, what kind of requirements should you be looking at? In other words, what kind of information do you need to figure out before you can get a business loan? Consider the following factors.
Nature of Business Funding:
Before you even start trying to get a business loan, you need to figure out what type of loan you want. There are primarily two types of business loans you can get. The more common one is the upfront business loan where the total loan amount becomes accessible to you soon after your get the requisite approval to get a business loan. The other type is the ‘at call’ business loan which could be in the form of a line of credit or overdraft.
The former is ideal for those businesses that need funds to start in the first place. Therefore, if you need funding to find the right space, get the right equipment, and even hire staff, then you need to get a business loan that falls in the category of upfront loans. Entrepreneurs who have the financial means to start their businesses but aren’t sure if they can keep it running may need to get a business loan that falls in the category of ‘at call’ loans.
Basically, you’ll need these types of loans if you need to have some cash reserve for potential future expenses such as refurbishing inventory, servicing large contracts, or anything else pertaining to maintaining cash flow.
Loan Terms and Repayments:
Even though you should get a business loan that suits your specific purposes, you should also remember that the terms and conditions of your loan will vary on the basis of the type of your business loan. For instance, if you get a business loan falling in the upfront loan category, then you’ll have to pay a portion of the loan along with the interest at regular intervals. The amount of money you’ll have to pay at regular intervals will depend on the interest rate being offered to you, the size of your loan, and the length of the loan.
The longer the length of the business loan the smaller and more convenient the repayment amount will be. However, the longer the length of the business loan the more you’ll end up paying by the completion of the loan. Therefore, it is advisable for you to calculate the size of the repayment amount your business can handle before deciding on loan terms. You should also know that ‘at call’ loans are harder to get but they usually don’t carry fixed terms with them.
Interest Rates:
When you try to get a business loan, you’ll most likely be offered two types of interest rates. The first is the fixed interest rate where the interest rate on your loan is frozen at a particular point for the duration of the loan. The other type is variable interest rate, where the interest rate on your loan varies according to central bank’s rates, economic situations, and market dynamics.
You should make sure that your business makes enough profit to keep up with variable interest rates, if that is what you’re going for because you would be taking on the inherent risks. On the other hand, when you get a business loan with a fixed interest rate, you’ll not have to worry about the risk because your lender will be bearing it.
Collateral Or Security:
With respect to security, there are two types of business loans i.e. secured and unsecured. When you try to get a secured business loan, you’ll be offering collateral in the form of real estate, gold, or even business assets. This means that if you’re unable to pay back the loan, then the lender has the right to seize your assets to service the loan.
Unsecured loans don’t need any collateral. However, because of this reason, unsecured loans turn out to be far more expensive than secured loans. Since the lender is taking a greater risk by offering you an unsecured loan, he will demand a greater interest in return.
From only the documentation perspective, you’ll need to, at least, provide a photo ID, an official proof of your address, your account statement dating back a minimum of three months, and your Curriculum Vitae or CV. It’s important to remember these document based requirements are the bare minimum.
Depending upon your circumstances i.e. the provider you’re approaching to get a business loan and even the nature of your loan, you may have to provider more documents. For instance, if collateral or security is involved in your loan process, you may have to provide document based proof of the chosen collateral to get a business loan approved.
Don’t Get a Business Loan before Shopping Around
Once you’ve figured out your explicit requirements, you are ready to get a business loan. However, you still need to be careful and not grab at the first approval you get. In fact, you should start your application process to get a business loan by approaching multiple commercial lenders and government institutions. The trick is to shop around and find the best option.
Once you start shopping around, you’ll find that terms, interests, and loan amounts being offered to you can vary between one lender and another. Make sure that you pick the one that suits your business most before signing any agreements.
Practice the Presentation and Interviews
In order to get a business loan, you may be required by different lenders to give a presentation or even sit for an interview. Apart from studying the documents you provide to them to get a business loan, they’ll also study your personality and capabilities before lending you the loan amount.
In fact, many business loan applications get rejected because the entrepreneur didn’t do enough during his presentation or interview. Therefore, you shouldn’t take such meetings lightly and always go into them prepared.
Ensure that your presentation is flawless and that you’ve considered every related question possible. Moreover, get your facts and statistics about the industry right to a point where you don’t have to search for them in your papers when asked a question.
Finally, pay attention to your appearance. It is easy to think that lenders only consider merit by focusing on your application and documented history. However, don’t be fooled by such misconceptions because lenders are savvy enough to know that entrepreneurship is more than just intelligence because every entrepreneur needs to lead his troops.
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