Whether you’re starting a business or running one, you can take out a business loan. If you’re going to take out a business loan, you need to be well prepared beforehand to ensure that you have the best chance of success.
Isn’t your goal to get the financing you need at preferential rates? Then you need to consider certain decision criteria. Let’s find out together in the following article what criteria you should consider before starting the loan process for your business.
The capital to be borrowed
Before applying for a loan, you must determine your financing needs. The loan you take out will be used to make a tangible or intangible investment. Therefore, the financing you need will depend on your project and your capacities.
So, how to calculate as objectively as possible the amount to borrow? Think about drawing up a business plan. In it, you will list all the expenses and investments planned for your project. Your business plan will also include a payment schedule.
The business plan will not only help you to see your project more clearly. It is also a communication tool that will allow the banks that you are going to solicit to better understand your project and to want to participate in it.
Once you have established your business plan, you will have a clearer idea of your financing needs. But this does not yet represent the capital to be borrowed. Indeed, it is very rare that financial institutions accept to finance more than 70% of a project. In fact, the ideal amount to ask for a loan is this proportion of your financing needs. The remaining 30% is your personal contribution. You can also obtain them through professional self-financing.
The ability to repay
Yes, you have calculated the amount you can lend to your bank. But can you afford to pay it back?
That’s another question you need to answer. If you don’t prove to your lender that you are creditworthy, you have no chance of getting your loan. A company’s ability to repay is based on its predisposition to generate revenue and make a profit.
It is on these two factors that the financial institution that studies your file will focus here. It will therefore analyze your company’s cash flow as well as your results (costs, revenues, profits). Moreover, one way to save money during your transactions is to use less expensive payment solutions for small businesses. Of course, they will also look at your credit history.
So if you want to be in with a chance of getting this loan, you need to prove your financial health, including by:
- Paying all your bills on time;
- Paying all your bills on time; – Clearing any outstanding debts;
- Limiting the overuse of your line of credit;
- Showing that you have already invested a significant amount of money in your business…
Here again, the business plan will be useful. It can help convince the bank that your business is viable, well managed and has potential.
Risks related to the business environment
So far, almost all the signals are green for your business. But it’s not over yet. Your organization’s performance does not depend solely on it. It belongs to an environment and some external elements can affect it.
Among these elements we can mention:
- The general state of the economy;
- Inflation;
- Recession;
- The exchange rate;
- The periods of growth and recession;
- The tax rate ;
- Competition…
These are all elements that you must not neglect because they influence the decision of credit institutions. Even though they are out of your control, you must integrate them in your analysis.
By doing so, you will prove to the banks you have solicited that you have studied almost every aspect of your financing project. This is an additional element that may arouse their interest in your request.
The guarantees to provide
By granting a loan, a financial institution takes a significant risk, especially if the amount is large. It too, like you, operates in an unpredictable market. Therefore, it must limit its risks. That’s why, during the evaluation of your loan application, they check if you are able to provide guarantees.
In concrete terms, these are assets that your company is willing to pledge. Furniture, equipment, building, inventory, vehicles can be used as loan collateral. They will become the property of your bank if you are no longer able to repay the loan.
To increase your chances of obtaining this business loan, make sure that the value of this security represents at least 30% of the loan requested. Thus, contrary to popular belief, guarantees do not serve to cover all risks. Its main role is to minimize the bank’s losses in case of default.
Details of the rates applied by the lending institution
You have a choice of different organizations to take out a loan with. While they offer similar services, they are not alike. For example, they have different objectives and workings. Some focus on professionals in one area of business while others are generalists. The first thing to do is to study their profiles in order to select those whose specificities best suit your project.
Then, you must study their financing terms if you want to benefit from the best loan conditions. Pay particular attention to the following fees:
- Account opening fees;
- The management fees;
- Multilateral interchange fee;
- Insurance fees;
- Fees related to cash facilities;
- The movement commission…
Take the time to compare them well to choose the best offer. You can also use the competition to negotiate preferential rates.
What to remember ? You must analyze certain criteria before applying for a loan for your company.
Take the time to analyze the 5 criteria mentioned above if you really want to increase your chances of getting your business loan under very interesting conditions.
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