Every business – both big and small – needs money. There are different financial institutions that both businesses can choose from to fund their business. However, bank loan is usually the most preferred for both small and large businesses. Since bank is dealing with depositor’s money, it is unlikely that they will invest it in a startup. If you plan on seeking a bank loan, here is a sneak peek of what they will ask of you.
You need to have hard asset when approaching a bank because they will definitely ask for something to hold on to that is at least of same value with the amount of money that you intend to collect. Collateral is a way banks protect their investment in you because if you should ever fail to pay back, they will have no other choice than to sell off your collateral. An exception to this is the Small Business Administration (SBA) which is backed by the federal government to release loan to startups with minimal or no collateral.
2. Financial details
If your business has been operational for at least three years, banks will always request to see your financial details including past and current loans, debt, bank accounts, investment account, credit card account, tax identification number, addresses and contact information. If you are running a startup, then, they will seek to see your business plan – although a business plan can still be requested if your business have been operational.
3. Audited financial statement
Note that the auditing has to be done by an auditor that is not affiliated to your business to give it credibility. The balance sheet should have a list of liabilities, business asset and capital. The profit and loss record should cover at least three previous years. It usually cost a few thousand dollars to get audited statements ready.
4. Insurance information
If your business has an insurance cover you are more likely to get a bank loan than when it is not. The whole bank verification process is geared at reducing the risk of lending loss and an insurance cover serves just the purpose. If anything bad – like death should happen to the person, insurance cover will help the banks get back their money.
5. Agreement on future ratios
A commercial loan will often have what is termed the loan covenant. In this agreement, the company will accept to keep key ratios like current ratio, quick ratio, and debt to equity, and so on. If your financial level falls below some of the key ratios in the future, you may be denied any further loans.
6. Complete details of account receivables and payables
Account receivables include account-by-account information, payment history and sales. Account payables on the other hand include credit reference. There are a lot of resource materials online that explains these concepts – account receivables and account payables in details.
7. Business plan
Almost all commercial loan application will require you to present a business plan. A business plan will show if your business is viable or not. Business plans are becoming shorter but banks still require them to access the kind of product you wish to bring to the market, the product market and how you intend to make your profit.
There is software for writing business plan
A good business plan speaks faster than words. There is online business plan writing software you and employ to produce an outstanding business plan. In very exceptional cases, a well written business plan can guarantee you a loan.
- Many startup businessmen usually go for bank loan as the primary source of funding.
- A well written business plan is essential when applying for loans.
- Business plan can be written with the help of online software.
- Lending institutions are always on the lookout for ways to reduce their lending risk.
- Commercial banks will usually request for collateral.
- It will be easier to get a bank loan if your business has insurance cover.
- Banks will scrutinize your profit and loss for the past three years.
- Banks will ask for an audit of your finances.
- If your business falls in some key ratios, your future chances of getting loan drops.
- You have to show your repayment plans.
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