How difficult is it to get a small business loan?
Many people believe that it is quite impossible to get a loan for a small business. people think that they simply can not start a small business and that, therefore, what could have become an incredible business never becomes a reality. Is it difficult to get a business loan? Certainly it is. Is it impossible? Of course not.
So, how hard is it to get a business loan? Is it a realistic choice for every type of person? To answer this question, consider what a bank or alternative lender looks at when trying to judge whether or not to support your small business idea:
To obtain financing, it is important to consider your business from the point of view of the lender. Would you like to invest in this? Will this business be profitable? Is it easy to get your money back or is it difficult? To get a commercial loan, you need to assure them that success will be enough so that the lender does not lose money. Investors certainly know that all investments carry inherent risk, but to be financially viable, they must be at least 90% sure of not defaulting. It’s pretty confident. Lenders will consider the following:
- Solvency or cash flow: How much money will go into the business and does this suggest profitability?
- Collateral: Should they have to wind up the business, will there be enough valuable assets to make up the difference between the loan?
- Legal and tax liability: Does the company have any type of financial or legal risk?
- Diversification: Will your source of revenue be sourced from one source or will it be more diverse, with the potential to generate more revenue from other locations?
The way you present yourself is very important because business is about interpersonal relationships as well as numbers. The people who lend you want to make sure that you are a responsible and trustworthy person. Of course, everyone thinks so, but banks will take a close look at past finances to make sure they have proof of your reliability:
- Years of activity: Is it a first entrepreneur (who is less likely to succeed) or a more experienced entrepreneur who has failed (who is more likely to succeed)?
- Credit History: This is the financial proof that you can repay a loan on time.
- Your equity: Banks want to know that you are personally invested in the project.
- Your personal guarantee: Do you guarantee that this will succeed, to the point that you will be personally responsible if it is not the case?
- Your brand: Are you able to launch and market your idea?
When applying for a commercial loan, your financial documents must be meticulously detailed. You should also have detailed plans indicating how you will succeed. This should seem reasonable and logical: Explosing your potential for success out of proportion will not help you here. When you project your income for the year, it should not seem like wishful thinking. In preparing for this aspect of your interview, it would be helpful to work with an experienced accountant such as Ignite Spot. An online outsourced accounting firm can help you compile this data more professionally.
- Cash flow forecast: Are the projections reasonable and logical, or are they exaggerated?
- Business model: Will the business be organized in an adaptable or rigid way?
More useful tips
- Ask yourself tough questions before they do.
- Collaborate from the beginning with an accounting firm, such as Ignite Spot, to help with the presentation of financial information.
- Build a lasting relationship with the bank in question.
- Be always realistic; do not overestimate your potential income.