As a small business owner, there will always come a time when you need a business loan, whether it’s for scaling up your equipment, a buffer stockpile or a down payment for new premises. And as you may have experienced, it is not that easy for small business owners to get business loans and then you need to know how to do the business loan ‘dance’ with the financial institutions.
We have put together a guide for small business owners to answer your question: “What is required to get a business loan?” It will help in your endeavours to secure financing from a variety of formal financial institutes and other SME lenders.
The Small Business Need For Loans
One of the challenges, albeit positive, of owning an SME that is doing well is that there comes a point when the growth requirements outstrip the available capital. Another way of saying this is that the business’s organic growth is insufficient for the demands of the market ‒ and bravo to you for achieving this challenge.
Even with a healthy cash flow to sustain any growth, your careful forward planning may reveal that an external injection of cash needs to help you take that leap to the next level.
While there is quite a bit of jumping through hoops, business loans are generally the option used by small to medium businesses to facilitate their growth. However, there has been a growing trend over the past ten years of small to medium business owners securing funding from alternate sources. Often seeking market disruptors that traditional financial institutions are not comfortable with, these alternate investors have broadened the availability of loans resulting in financing being available to a diverse range and type of businesses.
A business loan can bridge extra headcount costs, finance buffer stock, facilitate the renovation of an existing office or an additional outlet, or affect the purchasing of additional production equipment. This element of business could be critical to the success of your next growth phase, but how do you go about applying for it?
We have collated a combination of advice and a process to help you apply, and win, the funding that your business needs in order for you to soar to the next level. This exciting and helpful compilation includes:
How to create a business plan
Assessing sources of funding
Assessing the quality of your application and the chances of its success
Checking that all the document boxes are ticked
Assessing the loan offer on the table
Before diving deep into the steps to follow, let us pause and consider the areas of caution that you should take heed of before putting yourself into a business debt position.
What is business funding?
Business funding is relatively small loans (relative to the business size and potential) that are solely for the purpose of growing the volumes, earnings and, ultimately, the profits of a business. The funding is usually justified by a quantified growth plan, or it can simply be bridging finance.
The required, or mutually agreed amount, is provided by a financial institution or a conglomerate, and it has different pay-back options based on the risk appetite of the lender and your type of business. The repayments will include interest and the total payback period is a finite period of time. This is different to a silent partner investor who owns a portion of the company and regularly receives dividends as their only source of earnings on the investment made.
Business funding is vastly different from a home loan or a general loan because they are structured to service a business’s growth or stability needs. Each source of funding will have:
Different contract wording
Different risk appetite (amount of money offered)
The interest rate (and hence total debt)
Length of the loan period
Qualification criteria (e.g. some funding is for women only or fairtrade businesses only)
Due to the variances per funding option, it is important that you assess the funding partner carefully and make sure you are selecting the correct loan for your business and your business needs. You must also assess your loan request and the loan commitment requirements against your business style, industry and market segment, and risk appetite.
Business loans are not only available from the private sector, e.g. banks, credit organisations, brokers, alternative funding specialists and private lenders, but also from state departments. While there are the above-listed differences between funding partners, there are commonalities as well, which are vital for improving your chances of successfully landing a business loan.
Right, we’re ready to dive into the exciting process of planning, collating and preparing for your business loan application that will take your business into a whole new experience. Exciting times! Let’s go.
The requirements to get a business loan
Business Loan Step #1
We realise that this is no one’s favourite step, yet it is arguably the most important step in the process. Not only is it important due to the majority of funding committees insisting on it being created, but it is also an extremely valuable exercise for you to go through.
If you approach this step with commitment and honesty, you will get a sound image of your company now and the future projections. Therefore, this plan will reveal what size of a loan you will need, your ability to honour the loan, and the type of loan you need.
In the majority, it is the formal banking institutions and the historical lenders that ask for a business plan. But if you are looking for seed funding or investor buy-in, you will definitely require a business plan. The more business plans you prepare, the better you will become at creating them. They should be an honest representation of your business and status, or you will be misleading yourself about your business’s need for the loan and the ability to honour it.
As you can probably deduce, by submitting a business plan to a lender, you are theoretically reducing their risk. And what comes with lower risk? Lower interest rates. Therefore, it goes without saying that because alternative lenders do not usually require a business plan, there will be a higher interest rate. You will, in the majority, only need to fill out an online form and submit it. When you receive their offer, scrutinise if for:
Their rights to call in the loan
The implication of a loan call-in
The interest rate
The total amount due by the end of the loan
The penalties for paying off the loan earlier
The Business Plan Factor
Although we have pushed it, we are pushing it again – the business plan. Underestimating its importance will hamper your success regardless of whether you are applying for a loan. Most businesses that fail within the first two years do not have a business plan.
Two leading universities in the USA, amongst dozens of other institutions, conducted research on business failure and causes. The research statistics revealed these percentages, measured from startup date:
General percentage of businesses failing within 3 years 44%
Ringfenced to technology 63%
Percentage of businesses failing within year one 70% to 80%
Of the remaining 20 – 30%, percentage that fails within the next 4 years 50%
The two universities, and the plethora of other organisations doing this research annually, all concluded the same number one cause of failure: a lack of a business plan.
Shape Your Business Plan
The business plan step is strategically positioned first so that you can shape it based on the submission you will be making. When submitting a CV for different positions, you don’t submit a generic document ‒ well, if you are, here’s a tip, you shouldn’t be! Your business plan is your company’s CV so:
Do your generic business plan
Ascertain why you need a loan
Define the amount you need
This will inform the time span of the loan
Research and select the funding sources that give loans for those types of needs
Shape your business plan to suit the decision-makers. Don’t lie; just highlight the points that they are interested in so they don’t have to wade through loads of info to find it.
Business Loan Step #2
Be prepared to conduct thorough research into the diverse range of funding options out there. Don’t apply “willy-nilly” nor rush the signing because you are desperate to get started. You might find yourself tied into a loan that is wrong for your business or too difficult to honour.
In addition, a shotgun approach seriously damages your ability to get the loan you actually want. Each unsuccessful bid has a negative effect on your credit rating, so make sure:
What you want to use the loan for fits the criteria of the lender