If you’re starting a business, growing an existing one or need a financial lifeline to assist with cash flow, getting a business loan will help tremendously. However, a business loan is a different kettle of fish compared to a consumer loan.
The application and evaluation process can be long, complicated and stressful. It is also demoralising if your case gets rejected. Furthermore, there aren’t as many lenders offering business loans compared to consumer loans so your options are limited.
Therefore, you should consider consulting professionals such as an accountant, a business or mortgage broker before applying for one. You should also ask other business owners on their experiences getting a business loan.
There are a hundred and one things to read and understand before signing on the dotted line in the application form. Below are 7 things you should be aware of.
1. Not all business loans are advertised
This is because each business is unique, even when compared to another in the same industry. Therefore, lenders tend to review businesses on a case-by-case basis for loans. Big banks and small lenders may not advertise all their business loans heavily, unlike home loans or personal loans. Some may not advertise a product altogether, and rely on brokers for this.
A broker will have the knowledge and access to all the loans available in the market. He or she will act as a middleman to broker the deal, and build a compelling case on behalf of the business to the banks. This is one of the biggest benefits in using a broker for your business loan.
2. Pick the right loan for your business needs
Firstly, you must determine what you need the money for. For example, your cash flow may be erratic due to late client payments, a bad economic environment or just the general nature of your industry. If you’re not looking to expand the business but need the money to cover an unstable cash flow, then do not get an upfront business loan.
Instead, you should apply for a line of credit or overdraft. An overdraft gives you a maximum limit which you can draw down. This way, you can save money by withdrawing less during months when the business is doing well.
If you need to start or expand the business, then you need upfront payment to buy machineries and products, pay suppliers or open a new location. You should get a business loan where you get a lump sum of cash.
3. Most business loans require a collateral
Unlike consumer loans, business loans often require a security or collateral. Consumer loans can be given out based on your credit score without any type of security. However, a business with a good credit score may still need to provide some form of security such as a property.
This is because businesses are vulnerable to external factors, which may be out of their control. For example, a global financial crisis will weaken consumer sentiment and reduce spending. Legislations may also change which will affect industries. A newer technology may make old ones obsolete, thereby affecting older businesses.
Small lenders often require a smaller security amount or none compared to big banks. However, they will charge a higher interest rate. This is risky for businesses without a steady flow of sales or new businesses. Generally, those starting a business are required to provide a collateral.
4. Business loans are subject to a stricter list of criteria
Compared to consumer loans, business applicants must satisfy a stricter criterion. These are some of the things that will be assessed:
- The type of business and industry you are in. Certain industries are riskier to lend compared to others due to regulations, competition, barrier to entry, and economic climate.
- The business’s history and profitability. Generally, startup and new businesses without a track record will be scrutinised further.
- The seasonality of your business. Agriculture businesses with seasonal produce will make less sales during the off-season. They are also exposed to bad weathers and drought.
- The type and value of your security or collateral
- The current cash flow which shows your ability to make repayments
- The value of your business, which shows whether banks can recover the loan if your business fails.
5. Be prepared for a lot of paperwork
Due to strict requirements, you can expect to provide a lot of black and white proof when applying for a business loan. It pays to record everything digitally and hire a good accountant and CFO to go through your accounts to ensure everything is in order. Some banks need as much as 5 years’ worth of financial records. If you are just starting a business, you must declare your personal finances and assets to the bank for consideration.
6. Your business loan doesn’t have to be from one lender
In certain cases, you may get a business loan from two lenders or more to raise the funds you need. Each bank has its own set of requirements, so you may not be able to borrow as much as you plan. Often, lenders are more willing to share the risk of lending to a business with other lenders.
If your business loan has been approved at a lesser amount, do not despair and shop around for another lender who will lend the remaining amount needed. Once you’ve had your loans for a while, you can consolidate all your loans with just one bank to get a better deal.
7. Get your finances right before thinking of a loan
A business loan can be risky to manage, especially when you’re just starting a business. You must sort out your finances on top of projecting your cash flow and budget for the lifetime of the loan. This will help your business immensely so you don’t go under in a pile of debts.
You may be better off finding other sources of funding instead of a business loan once you calculate the numbers. A good broker will be able to assess the health of your business, and evaluate your business plans to advise you on the best approach to raise funds.