Entrepreneurs obtain business loans for different reasons. In many cases, they do it because they plan to expand their operations, but their company currently does not have enough capital to make the expansion process feasible. Businesses in all industries do need business loans from time to time to keep their doors open. However, since financing options these days abound, choosing the best loan provider may become a bit daunting. If you’re a new entrepreneur then you have to know the basics and the most essential things that you need to prepare before signing any loan documents. The following information will serve as your guide in making business loans.
When looking to obtain a business loan, you need to find out first which financing options best suit your company’s needs. You have to find out more about the different types of loans which may include term loan, equipment loan, purchase order financing, secured loan and invoice financing. It will become easier for you to find the best lenders for business loans once you have completely understood your options. Besides opting for lenders that offer loans at a lower interest rate, you also need to look for a company that moves quickly when processing and approving your loan. This way, should your company faces financial shortage you won’t have to wait forever before financing comes in to save your business.
It is true that banks do grant loans to budding entrepreneurs. However, your business also needs to have hard assets that will serve to back up the loan that you filed. Banks are very keen about looking into these files to ensure they will also be able to reduce the risk. When an entrepreneur who files for a business loan pledges his Accounts Receivables, the bank will have to carefully check these accounts to be able to confirm if these companies are indeed solvent. Banks will also usually accept only 50-75 percent of these receivables to back up the commercial loan you filed. If you want to obtain an inventory loan, the bank will also more likely to accept only a portion of it. However, before they do so, they would need to thoroughly check everything first and see if none of it were already obsolete or too old. This collateral requirement may also warrant some entrepreneurs to pledge their personal assets which can be in the form of house equity.
Although some banks grant a loan without requiring any business plan, but the majority of them would look into your business plan document. But, this does not have to be a lengthy one. Some banks accept even a lean business plan. However, most banks would still require the submission of other relevant documents such as a summary of the company details. They will be asking for proof of other important information such as your company’s financial details, product, team, and market.
Audited Financial Statement
Another essential when filing for a business loan would be your audited financial statement. The balance sheet should have complete information about your capital, liabilities and business assets. The information listed here has to be the latest and not outdated. Before you hand in your Profit and Loss statements, see to it that it should show information for the last three years. But, if you have good credit, as well as enough assets to pledge, certain exceptions can be made by the bank.
Before you claim to have audited statements, see to it that you have paid a CPA to look into it and take legal responsibility for its accuracy. Bad audits may put a CPA’s career at risk. This is why as your business grows, you should also have audited statements always prepared so there won’t be any problem that may arise when a bank asks for such a statement.
A Loan Covenant
Proof of an agreement for future ratios will also be required by the bank. This agreement is also referred to as loan covenants which means that your business is amenable to keeping some key ratios that are within limits and are specifically defined. Technically, if in the future your financials will not be able to reach this specified limit, you will automatically be in default of the loan.
When handled and managed well, business loans can certainly help budding entrepreneurs with the day to day operations of their business until they find their earning assets becoming sufficient to cover the costs of their working capital. Note that business loans also come with some risks so make sure you are completely aware and have fully understood these things before finally signing the document.