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Four Things To Do Before Applying For A Loan

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Irrespective of the size of loan you wish to secure, whether for a small or medium size project, there are some things you must know and act on before submitting your application.

An entrepreneur may seek to raise capital for a commercial venture for a variety of reasons. The money may be needed to start, grow or turnaround an ailing business. For our purpose, the focus here is on entrepreneurs engaged in small businesses.

It is important to say, upfront, that the likelihood of a bank advancing credit for the start of a small business is less than zero, mainly because, strictly speaking, a new business can be better considered as an idea. It’s a business in the making.

In other words, only a going concern, a business that is running, a business that is building traction, and has some revenue streams to back up its credit-servicing proposal, that strands  a chance of being listened to by a bank.

What this means is that the prospective lender must consider you business credit-worthy and has reason to believe that it is dealing with an entity that has the capacity to re-pay the loan it is seeking to obtain. With that settled, here is a short list of what you should know before applying to a bank for a loan:

  1. Do Your Home Work. Your first line of action is to find out the funding options that your target lender has on offer for your kind of business. In choosing which kind of loan to apply for, you have to match the nature of your business and the type of loan you will choose. For example, you will be putting the wrong foot forward if you apply for a high-risk loan for a short-term business. So, if your business is short-term, you will be better off with a low-risk loan.
  2. Have A Business Plan. Not just a plan in your mind. You have to produce a Business Plan that serves as your marketing tool for your business. The substance of the plan is to introduce your business to your potential creditor(s), indicate how much the business want, what it will do with it, and how it plans to liquidate the loan.
  3. Your Finances And Accounts. An accurate statement of the Finances and Accounts of your business gives a snapshot of how well or how badly your business is doing in its marketplace. While this may be incorporated in your Business Plan or attached as a separate document, what it tells a lender is pivotal to the decision to fund your business, or withhold credit from it. The plain truth is that banks don’t lend money to businesses that are not making money. A business struggling to make money is a red flag that the business will have great difficulty in repaying the loan, let alone allowing the lender to earn interest income on its advance.
  4. Collateral For The Loan. A collateral is anything of value which the business, the lender, is willing and able to hand in as security for money borrowed from a bank or similar lender. The understanding is that, should the business be unable to re-pay the loan for which it is pledged, it will become the property of the lender who will then be able to deal with it in whatever way it deems fit, for the purpose of realising the funds loaned to your business.

It is often a challenge for small businesses to find assets to pledge as collateral. In some cases, however, the character of the Business Owner, the cash flow of the business, a guarantor to pay if the business cannot, or a combination of these, could be put in play to collaterise a credit transaction.

Good luck in your search.

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