Without capital it is very difficult to start a business. Small business Loans are the most common source of financing for small businesses world wide. But however, they are the most complicated source of finance.
The main aim of this page is to give clear and detailed information that will make you better prepared to face the banks and ask for a small business loan!
The fist step is the introduction of the customer: Many lending institutions do not like to do business with people they are not comfortable with. References are no longer taken on every occasion when an account is open, but the account opening procedures should be such as to establish, as far as possible that the borrower is honest and trust worthy.
Approaches for small business loans from customers from other banks merit special caution. The question could be why is the approach being made at all? Or has the proposal been rejected by the other bank. You as the borrower need to have a financial track record, but if you don't have one a degree of suspicion is created. Well most banks prefer you approach them either with your attorney or accountant.
The second step is writing the application: This can take many forms but you should include methods of repaying the money borrowed and the assessment of the contingencies which might reasonably arise. Or in short what are you going to do if things go as expected? And how will you as a borrower intend to deal with them. This might be a detailed written form though in certain cases a near verbal interface can work.
The third step is the review of the application: at this stage all the relevant information that you as a small business loan applicant should be tested and other data sought after if necessary. Either formally or informally, at this stage the lender applies what I call the cannons of good lending. The most applicable canons are called:
1. Character: it is important to note that it is virtually impossible to ass the character of an individual after just one meeting. It is an extremely difficult area for self evaluation as an entrepreneur, but it is vital to get right. Write down the facts about yourself and your business. Facts not opinions are crucial; the following questions are keys to a good self evaluation as an individual.
(a) How reliable are my worlds as regards to the details of proposition and my word as regards to payment?
(b) Do I make exaggerated claims that are too optimistic or reasonable?
(c) Do I have a good track record or was their any previous borrowing and did I repay it without trouble?
(d) If you are new why are you making the approach to that particular bank? And also can your bank statements be seen to access the conduct of your account?
2. Ability: this relates to you as the borrower if you have the ability to manage financial affairs and the small business loan. The following questions can be very helpful in gagging the ability to handle finances.
(a) Do you have the management team that has a good spread of skill and experience especially in production, marketing and finance?
(b) Does your management team hold relevant professional qualifications?
(c) Is my management team committed to making the business successful?
(d) If the loan application is successful-is the money going to be used for specific area of operation (activity), if so do I have necessary experience in that area?
3. Margin: the margin in tells that you have the capacity to pay the intrest charged on the amount borrowed (the principal). It is important to access the ability to pay the intrest that will be charged on the loan capital. The margin by definition is the cost of borrowing that the bank will charge you.
4. Purpose: You need to have a clearly focused purpose as to how the money will be used; the seriousness of the business and what values will it bring to the industry.5. Amount: it is important to note that the amount that you want to borrow must be consistent with the character, ability and even the purpose for which it is being borrowed. The benefits of that the community will have when your business comes into operations should also be put into consideration.
6. Repayment: this entails how you will repay the loan and involves the periods, instalments and the total amount to be finally paid in order for the loan to be liquidated.
7. Insurance: the business environment is highly dynamic-that is to say it is changing at a fast pace and sometimes even at the point of overtaking logic. Ideally the cannons of good borrowing should be satisfied irrespective of the security you have available, but security is often considered necessary in case the repayment proposals fail to materialise.