Do you need a loan for your business? Read our comprehensive guide on getting your small business loan, the documents you will need, your business plan, eligibility and the type of business loan you should go for, along with the type of lender or bank that will suit you. Serves as your basic check list and information guide.
Before you go for a business loan, take your qualified accountant into your confidence, unless you are one yourself, and you look after your company financial accounts. Loans are based totally on financials, accounts, business projections and interviews with the bank or advance lender, so working with your accountant from the beginning puts you at an advantage, apart from the fact that accountant’s experience and expertise also helps a great deal. The accountant would also be required, if the bank calls you for an interview.
The first thing you should do is to calculate the Debt-Service Coverage Ratio, or DSCR, for your firm. It is an easy to understand ratio, which tells about your firm’s financial strength and repayment capability. It is calculated as follows:
DSCR = Total Debt Service of the firm / Net Operating Income of the firm of
Total Debt Service is the total amount of debt that the firm pays in an year.
Net operating income is basically income before interest and tax, which is revenues – the certain operating expenses. It is kind of a gross profit.
For example, if your net operating income is 540000, and your total debt outlay is 125000, then your.
DSCR = 540000/125000 or 4.32
Please note that the higher your DSCR is above 1, the more eligible you will be for your loan.
If your DSCR is below 1, then it is better that apply for the loan later, after improving your DSCR.
Also note that banks and lenders may calculate your DSCR is slightly different ways, depending on your financial papers and banks’ practices. Never-the-less, your own calculation will give you a very fair idea of your company’s financial standing.
Now that you are confident on your DSCR score, let’s work on the process, the documentation requirement, the purpose and the amount of your business loan. The following will be the documents that banks and lenders would be looking to get from you, to process your loan:
This is very very important as you will be questioned on these parameters first. You need to get to the base of your business requirement and process, identify the amount of loan you would need to serve a specific purpose, the benefits your business will get from it, and the ease with which the business will be able to repay the same, including the repayment amounts and the time period.
Another important aspect is the purpose of the loan, and it is of enormous importance that you use the loan proceeds only for the purpose you took the loan for. For example, if you have taken a loan to buy raw materials, never spend it on something like furniture and fixture, as such activity may derail your business and result in a failure.
You know how your business works, others don’t. But lenders and banks need to understand how your business works, and its cash flow, if they are going to consider you for an advance. So, in unison with your qualified accountant ( and he should vet it too, with his stamp and signature ), meticulously draw your business plan, giving every possible detail except proprietary ones, clearly showing future business and cash flow, and submit it with your loan application.
Draft a proper and formal loan application, and mention why you need this loan, and how it will benefit the business. Make sure you mention all the annexure papers you have included in this cover letter. Your business profile should also be included, along with your business plan.
These papers/documents are commonly asked in every loan application. More documents may be asked for, when the lender have studied these papers:
As mentioned before, the loan application, business profile and business plan with future projection
In case the business has a credit score, that will be the prime factor, along with owner’s credit scores and minor factors. In case the company doesn’t have a credit score, the owner’s credit scores would be considered for the same.
If the score is 680 or above, you qualify for SBA loans, which are probably the best form of loans a business can get. Find more about SBA Loans here. A minimum credit score of 630 and you can apply for equipment financing or business lines of credit. If you have scores lower than that, but not less than 550, you can still go for short term advances and merchant cash loans. A score of 500 can also get you a loan, but you will end up paying a lot more cost and interests, and it is advised, that you do not try to get any loans if the credit scores are at that level. Work on getting your credit scores improved, and then apply for your loans. Find out about these different types of business loans and advances like business lines of credit equipment financing loans etc, click here.
The minimum time for which your business is operational, according to your bank account statement, is six months, before you can apply for a loan. However, banks gets more comfortable, if the operational age of business is more that 1 or 2 years.
It is expected that you have business checking accounts with six months or more transactions to show. Please get your checking accounts statements ready, before you even think of a business loan.
It is expected that you are clocking a minimum turnover of $100,000 to $250,000 per year, to even have a requirement of a loan and to apply. This however, doesn’t apply to start ups, who are evaluated in a different manner.
All this is done so that your lending bank is convinced that it is worth taking the risk of advancing the loan to your business.
An agreement is always 2 or more way, and loan agreements are no different. Before you accept a loan offer from a bank or lender, the following factors should be checked in them:
If the lender is offering you a certain amount, which is below your required amount, do not accept the loan. As seen in case studies, having an amount lesser than needed, is far more dangerous than not having the amount at all. Find a different lender, who will advance you the amount you need.
If you have calculated, and have asked for a specific loan, and the bank is offering you a different product, then take your time, evaluate the consequences, and then take your decision. Always remember, that your business should not get stressed because of the loan taken, rather, its operations should get smoother, and it should get stronger.
If you are comfortable with a specific loan repaying term, and the bank has changed the same, especially if the bank has reduced the time period, then you may be better off in not accepting the offer, as accepting the offer may put strain on your company finances. If the time period has increased, then your monthly burdens will lower down, but you will be paying more absolute interest. So again, consider carefully, along with your accountant, and then decide.
If you are required to pay a down payment, make sure that you are not compromising too much on your liquidity. Check for hidden costs like part or full loan pre payment charges, EMI missing charges, whether a moratorium can be sought, and kind of securities that may be involved. Check what you may lose incase you are unable to service the loan. If it is a business loan, then losses should be limited to businesses, and they should not percolate to your personal savings or assets. There should also be no costs prior to disbursement of loan, like loan application. Also, your EMI should always start 1 month after your loan amount have been disbursed, there should be no concept of pre emi or advance emi.
This is of prime importance, and you should do every research possible, before you accept a loan partner. Check for reviews on the internet, check for experiences of your friends and families, who have taken similar loan products from the concerned lenders. A little bit of research will take you a long way. Remember to check out U.S. News' business loan reviews as well. You can also access your state attorney general, if you want to know about a lender in your US state. There should also be a reliable customer care service of the provider, so that you can reach them at ease at any point while you are their customer.
Well heck, NO! You can always take loans of personal nature, and drive them to your business. You only have to be sure that your business will be able to service the loan, as else, you stand to loose personally. For example, you can take personal loans, family loans, property loans and even house improvement loans. Talk to your existing banker first, to know more about the special offers that they may have for you.
In the US, there are also other options like crowd funding, where you can crowdfund your idea. A quick Google search can lead you to the popular crowd funding sites.Scheduled grants can be yet another option to finance your business. For certain business types and area, the USA federal government, as well as private organizations, have ear marked grants, which may be accessed, and they generally work out far better than bank loans. Search if your business qualifies FOR SUCH GRANTS, IN THE Google search box below:
Short answer is Yes, but wisdom answer is DO NOT go for them. They will come at very high interest rates, will put your in a debt trap, and soon you will find that no matter how much you are paying, you cannot seem to get out of your debt. Your business and papers will be put to more scrutiny, and you will compromise in your reputation, losing all your peace of mind. Talk to a lawyer instead, if you are in such a situation, who will help you get out of this mess, and will put you in good credit standing again, in a span of 2 to 3 years.
Author: Surjendu Ghanty, Entrepreneur, MBA