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Why Business Loans Cannot Cure Lack Of Business Income

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There is something lenders call the business loan hustle.

Whether they are large financial organisations like banks or similar institutions that advance monies that are to be paid back with interest, lenders get used to Small Business Owners requesting for loans to run their businesses.

A business loan is credit that is obtained on behalf of a business. This credit is in the name of the business, and based on the ability of the business (not the owner) to repay it.

Business credit confers many unique benefits. It builds a credit profile for the business, which is different and separate from the personal credit profile of its owner. It doubles the borrowing power of the Small Business Owner, as it translates into a credit-worthy profile for the business and the owner.

Furthermore, a business commands a higher capacity for credit than its owner does. Which is why approval limits are usually much higher for business accounts and lower for personal accounts.

When the average Small Business Owner meets the average lender, the conversation runs like this:

The Small Business Owner will not say the business is not generating enough income. The Small Business Owner will not say the marketing and sales team is not moving enough products or services and, hence the business is not making enough money. The Small Business Owner will say something like the business is not making money because it does not have working capital. The Small Business Owner will say that the business will boom once it receives the loan.

After listening to the Small Business Owner, the lender will start asking questions like: What is the personal credit of the Small Business Owner? How long has the business been in existence? How much money does the business make in a typical month? How much income did the business generate in the preceding six to 12 months?

As the lender continues this line of questioning, it becomes increasingly clear to the Small Business Owner that the lender is gauging the business and its owner, and  determining if the business can satisfy the requirements for a successful loan application. It then begins to dawn on the Small Business Owner that the business is required to give something before it can get something.

It’s true that there is plenty of money out there for lending. It is also true that lenders want to lend. The greater truth, however, is that no lender wants to lend to a business that does not show signs of surviving, not to talk of thriving. Lenders want to see the transactions being handled by the business. Lenders want to see cash flowing through the business. Lenders want to see a business with a history of bringing in revenue, on a regular basis, for a number of months, if not years.

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Your business must put in the work before it can get a loan. Your business must first show the lender its own money, and assure the lender it has the capacity to make money. Your business must demonstrate a sustainable way of generating income. Your business will not get a loan if it appears to be on the brink of financial failure.

Before considering whether to approve a loan application, or the rate and terms of the loan, a lender or similar credit issuer needs to be convinced that the business has a capacity to make money, and this is evidenced by visible and sustainable streams of revenue.

In the absence of this proof, a loan advance would at best be a bandage for the business, a palliative, a stop gap that can only kick the ball down the road. At its worst, such a loan will put the business on a fast track to closing shop, which will inevitably happen when the creditors come calling and the business is unable to make repayments as and when due.

Don’t be a victim of the business loan hustle. Don’t mistake the failure of your business to generate income, which may be the result of its failure in marketing and selling, for an imagined need for business loan which, you believe, albeit erroneously, will magically transform your business into a money machine. The plain truth is that you will be setting your business and yourself on the path of financial ruin if the business, somehow, manages to procure a loan but lacks the capacity to generate the income it will need to repay it.

Your business must first show that it can make, and is indeed, making money. Lenders base their decisions on the current revenues of the business. When income is streaming into the business on a regular basis, the business can then leverage these inflows to get the money it wants. A business searching for money from a position of lack is no better than a person trying to fetch water from a dry well. Such an enterprise is like trying to get something for nothing and will not work.

Contact Us Now if you need a business loan or need to generate more income for your business. Or drop us a line via ted.iwere@smefinance.org if you are itching to start, grow or scale your small business.

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