How to apply for a small business loan
So what is a small business? The definition will vary from jurisdiction to jurisdiction. Generally, the number of employees is what will separate a small business from a big business. In the United States the number is placed at 100 while in Europe the number is usually 50.
Small business owners will always seek business financing for several purposes including the buying of new assets, expansion and even to pay off existing debts. Although there are many sources, most investors will always feel comfortable to use commercial bank loans to finance their businesses.
For established businesses, with a strong capital base, access to loans may not really be a problem. This may not be the case for small businesses. How these can apply for a business loan is a worthwhile discussion.
The proposal made to the banks should include the following salient points:
- A short history of the business and its projected growth;
- Resumes of each of the owner and key management;
- Collateral/security for the loan;
- Current financial statements; and
- A loan repayment plan.
Business financing and history
Applying for a business loan for the small investor is normally stringent because commercial banks are afraid of the high servicing costs that may be occasioned by the lending. The short history of the business will give the banker a clear picture of where the business is heading and that it will function without the intention or threat of liquidation for the foreseeable future.
The “foreseeable future” is usually regarded as at least 12 months. This is called the “concept of going concern” in accounting language.
Experience prior to financing
The business experience of the owners is also of great importance to the bank. It is always in their interest to know whether the loan advanced will be well managed and whether there is any major risk involved in lending. A well written resume will certainly give a good first time impression.
Collateral security
Business financing through loans and the applicable collateral security are two inseparable friends. Collateral security is the extra assurance provided by an investor to the lender to bolster his/her promise to pay the amount borrowed and any applicable interest.
The main reason for security is to ensure that in the event that the borrower goes into bankruptcy, then the lenders right over the property being the subject matter of the security will precede the any right claimed by other creditors.
Collateral security includes true legal mortgages, equitable mortgages, statutory mortgages, equitable charge, floating charge, pledges, legal lien, equitable lien and hypothecation.
The process of securitization requires careful consideration and advice from legal and tax experts.
Loan repayment periods
The ability to repay a loan should be included in your plan when approaching a potential lender. It may be from your business proceeds, salary or re-financing from another lender. A business proposal should try as much as possible to show that the business will be able to fund the loan from its profits as this may give the lender some confidence.
It should be in your thoughts when applying for a small business loan that it’s a loan like any other and failure to repay will give you and your business a bad credit history. It is not a great possession.
Loan application requirements will vary from lender to lender and the more a small business owners approach lenders the higher the chances of getting a loan.
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