Getting a business loan for your small business or a start-up can be very challenging. The bankers usually get attracted towards companies with strong cash flows, proven track records and hard assets that banks can take charge of as collaterals. The above-mentioned requirements are not very common met in the case of small businesses.
A small business owner needs to understand that it is of utmost importance to the bankers to ensure the recovery of funds they let out. To do that they will ask for collaterals, personal guarantees, etc.
Our aim should be to give out as little collateral as possible so that we can use the rest to finance other business needs.
So what should a small business owner do?
Well to start with, in most of the countries the governments have realized that small businesses are very effective in creating employment opportunities and are the major fuel to drive economic growth. Hence, majorly all the countries across the globe have devised a lot of small business support schemes that focus on easing the pain of borrowing for small business owners. These schemes are devised to provide a lot of support and assistance by way of subsidies and help of other sorts to get a small business up and running.
To avail these schemes usually the business owners just have to get registered under the specific government bodies, get some certifications and Bam!! You become eligible for far more options than before. So checking out the regional and national policies of your country (related to the welfare of small businesses) can prove very useful in the process of raising money for your business.
Related : How to Register Your Start-up
Now, when u approach the bank for a Small Business Loan, it is important that you have a brief understanding of how does a bank determine/analyze if a given business is fit to be funded. Banks usually analyze every business on the following three broad risk categories.
Financial Risk, Financial risk analysis comprises of studying and analyzing the balance sheet and its ratios to determine the capability of the business to repay the proposed loan. The financials of a business helps the investors to understand the health of the cash flows of a company. So it is very important to have your financials in good shape so as to give a fair representation of the financial health of your business.
Operational risk refers to the probability of business incurring losses due to internal factors like Out- dated systems, Procedures & Policies. It is important for businesses to have sound operational risk mitigation policies. Businesses with intensive human capital requirements have a higher chance of human errors and companies with higher regulatory obligations have higher Operational risk in case of changes in government policies.
Understanding these risks and having important procedures in place improves the sustainability of your company and makes it more credible in the eyes of Banks and Financial Institutions.
Management risk refers to the risk arising from inexperienced or unfit management team and policies. Bankers tend to examine the longevity of business on the basis of the soundness of your management skills and succession plan in case of your absence. The levels of management involved in running the business (Levels: Directors/partners, Managers, Supervisors, etc.) and their experience and qualifications also matters. This plays a vital role in the acceptance of your proposal as a bad history of the promoter or key management person might prove to be a deal breaker.
- After the above mentioned points. The final most helpful thing while applying for a small business loan is a well-written business plan and a small business loan proposal document. These two documents will answer more or less all the queries a banker might have about your business and loan requirement giving them a clear picture about the future of your business and its creditworthiness. Now, while writing this business plan you have to take into consideration the following questions: What would a bank want to know before lending money to my business and how would it view my business plan from a credit perspective? What industries does the bank view as risky and what measures does it expect the company to take to mitigate those risks?
Writing a detailed business plan includes:
- Details of business activities
- Growth plans with well-defined milestones
- A brief history of the promoters
- Snapshots of current and past financial statements to highlight the past track record
- Projections for the coming years
- A record of orders at hand and to be received
Business loan proposal document:
This document should include details of your loan requirement and the type of loan facility you seek to avail i.e. short term, long term, revolving facilities, fund based, non-fund based, etc. Write about all the strengths and weaknesses of your business along with mitigants so that banks are assured that you know your business. Highlight exactly how you intend to apply your freshly acquired funds and then the most important part; prove how you will be able to repay those funds that you have borrowed along with interest and on time. (Pro Tip: Before submitting the documents just get your financials viewed again by your finance guy for any unfavorable ratios that might pop up and try to
not highlight them).
Finally, you need to understand that making your business credit worthy is not a one-time activity but an ongoing process. Using the above-mentioned pointers as guiding tools for your next Small Business Loan Application will surely get you more interested lenders with better offers.