Getting financing is the biggest obstacle to startups – especially in African countries. While there are several means to get funds for your business: investors, bootstrapping and a current job among others, not everyone has access to those means. If you decide to take the business loan route, but are finding it difficult or don’t know how to go about it, this article will outline 5 steps to help you along. Finding, applying and getting approval for a business loan is not easy, but preparation is key to getting a better shot at approval. Here are the 5 steps.
- Build a good relationship beforehand: If you have a good relationship with the lenders, it will greatly increase your chances of getting your business loan approved. Start working for it before you have need for the loan. Get to know the major players and let them know about your company even before you make a formal pitch for the business loan. If they know you and like you and your brand, chances are they would be interested in doing business with you.
- Know exactly why you need the business loan: This is one of the important questions that lenders and financial houses ask. Your reasons should likely fall into any one of the following:
One: to found your startup; two: to grow the business; three: to cover the cost of the day-to-day operation of your business; four: to have a financial cushion. Keep in mind that some reasons for applying for a business loan will keep you from getting approval. Reasons like: financing ongoing losses and acquiring unimportant business assets. Make sure the reason for the business loan are strictly business related and don’t include personal comforts.
- Determine how much you need: The amount you ask for should be just right, make sure your projections are as precise as possible. A lot of small businesses underestimate their needs either because they are afraid they are asking for too much or because they don’t do their math properly. Keep in mind that underestimating the amount you pay will lead to problems much sooner than anticipated. Asking for too much, on the other hand can make the lenders call your credibility into question. Make sure your budget is properly thought out and supported by reasonable financial projections.
- Know if you qualify: Your reliability will come under scrutiny by the lenders. They still look at credit scores of principals, so it’s advised to know what they look for and how your scores compare to their standards. According to Aileron, these are the standards most lenders look out for.
- Credit score: A credit score of above 650-700 is considered acceptable, but does not guarantee a loan. Most lenders will look for a credit score that is at least in the 700-800 range.
- Debt to income: Personal debt payments should not be more than 33% of gross monthly income.
- Time in business: Lenders give unsecured working capital lines and term loans to businesses which are over 2 years old and have a reliable record of incoming accounts receivables.
- Report on industry risk: Industry risk is rated based on the government SIC codes which are ranked. A small business owner needs to find out how their industry is rated.
- Report on cash flow: The higher the operating cash margin, the better the chance is for a business to survive slower market conditions and ensure long term survival and growth. In the final analysis, most lenders give money based on the company’s cash flow since it measures the ability to successfully repay the loan.
- Get a lender: Different types of lenders exist and you should find out which type is best for your business. The major kinds of lenders for a business loan are:
- Commercial banks: For traditional loans with strict parameters.
- Non-bank lenders: These are increasing steadily for lenders looking to get higher returns. Sites like Fundera can help you locate such lenders.
- Lenders by region: Local community banks and other lenders that have an interest in economic development in a certain area or industry.
- Micro and alternative lenders: Crowdfunding sites like Kickstarter and IndieGoGo can be helpful for business loans under $10,000. Peer to peer sites like Prosper and The Lending Club can be used for personal funds