Pitfalls to avoid when accessing/considering a business loan
I am passionate about small businesses and helping them grow;…
business owners bootstrap at the beginning of their business ventures. As it is, banks don’t fund ideas, hence, there has to be a business in place before one can think of applying for bank loans.
With growing expenses to be sorted, it is quite difficult to run a business without any external funding . In a situation where investments are not forthcoming, and the business operations have to continue, one could only resort to applying for loans from banks.
The thing is, it is likely your application is turned down. Bad news, right?
Having a knowledge of pitfalls to avoid when considering a business loan could prevent you from going that road without taking the necessary precautions.
Lack of substantial cash flow
Put yourself in the position of a money lender, would you lend someone money even when you are aware that they are not capable of paying back? No? Exactly my thought. The same applies to a banker. You will most likely not get a loan from a bank when it’s obvious you do not have a consistent cash flow. That begs the question of how you will be able to pay back within the stipulated period.
As a lender, a borrower capable of paying back will be the first on your list as you are sure to get your money back within a specific period of time. Banks also favour start-up that have a steady cash flow. Although, it doesn’t mean your start-up doesn’t have potentials to grow, they can’t just risk it.
Lack of track record
A track record shows all the financial activities an organization has done in the past, which shows how good they are at doing their job, dealing with problems etc.
General requirements are:
A minimum of 3 years in business before getting a loan from a bank.
You must have operated your account in the bank for no less than 6 months.
No bad loans in any bank.
Audited account signed by a credible accounting firm.
Your business must be profitable.
Your financing request must be sound and realistic and not speculated.
The best way to fix this is by investing in a cloud accounting software. This will allow you keep track of your business finances and generate financial reports (
bank statement, profit and loss statement, balance sheet ). You don’t have to worry about losing data; all you have to do is print out the necessary reports when the time is right.
Preparation is everything. You want to start a new business venture, you have to prepare for by doing market survey, feasibility study, to mention a few. So is preparation required when applying for a loan. You want to apply for a loan in 6 months – a year, you have to start preparing now.
Having a detailed track record is one of the ways to prepare for a loan application, a well written business plan is also an important document to present to bankers when applying for a loan. This will serve as the road-map of where your business is and where you intend taking it. It is advised to research on any other document you will need and have them ready.
Time in business
Applying for a bank loan may not be the best option for a newbie in the business world. Banks usually look out for a long record of stability and success. In this case, they are somewhat reluctant to grant loans to business owners in this category.
Lack of collateral
Collateral is a property or other asset that a borrower offers as a way for a lender to secure the loan. If the borrower is unable to repay the loan as at when due, the bank can seize the collateral to recoup its losses.
As a startup, your collateral value may be lesser than the estimated fair market value of your asset that is being used as loan collateral, thereby making loans inaccessible.
Does your business fall under a sector considered to be declining? If you are, your application will probably be declined. What banks are concerned about is that you are able to repay every kobo; anything that will hinder that isn’t happening.
Applying for the wrong type of loan
Most of the times, small business loan applications get turned down by banks not because business prospect isn’t good enough, but because of the type of loan they are applying for.
For instance, a business owner who is into e-commerce is applying for loans in Bank of Industry (BOI). Chances are that such business owner will not get the loan because BOI targets businesses in the manufacturing and processing industry.
As a start-up owner/entrepreneur, you have to do your homework of the financial institution to apply for the type of loan you want.