Seven tips on getting a business loan

There may be somewhat of a ‘banking war’ going on as Banks push to recruit new customers but they are still selective about whom they lend to – especially when it comes to getting a business loan.  Now, as much as at any other time, you must win the confidence of your lender when funding a business purchase.  There’s no silver bullet you can fire to get that ideal business loan, but there are some guidelines that can help you succeed.

1. Look organized – even if you’re not.
Arrive for your appointment with the tools to paint a clear financial picture.  Have your Statements of Financial Performance (Profit and Loss statements) for the last three years, the last months trading since balance date, a full break down of company assets (Land and Buildings, Plant and Equipment, Fixtures and Fittings, Vehicles and Goodwill),  cash or equity you have and security you are willing to supply.   Have your Business Plan available – you will also need to display you have the skills to do the business ie. your brief CV and the CV of any other directors being appointed.

2. Clean-up your “a/r” and “a/p”.
Your accounts receivable and accounts payable need to be timely. Lenders don’t like it when they see a business waiting for lots of money to come in.  If someone is getting paid in 90 days but has to pay his vendors in 30 days – there’s a problem.

3. Your assets – Banks care about what you’re worth now.
Bankers are going to want to tie up more assets than the loan is worth whenever possible.  Lenders will look at your assets not in terms of what you paid for them, but rather in terms of what they could be sold for if the business is ever to be liquidated.  Overall, this is going to favour the manufacturer with a brand new production line over the information services business with rapidly depreciating computer equipment.  You can’t do much about this, but be aware and plan accordingly.

4. Improve your loan-to-value ratio.
Desirable loan-to-value ratios vary by industry.  Leasing companies, for example, tend to have higher acceptable loan-to-value ratios.  What lenders are looking for is the ability to make it through a few ‘rainy’ days.

5. Lenders want interest payments plus more.
Most lenders want to see that you can generate enough cash to not only service the debt but also to pay back principal and cover any potential contingencies.  So instead of just interest coverage, you have to think about and be able to show how the business will cover and repay the debt.

6. Banks like you to borrow, but not too much.
A business that has a track record of borrowing and repaying always has a leg up on getting a new loan. However banks will usually look at the interest cover, one such calculation is; (net profit + interest costs) / interest costs = interest cover. ie. ($30,000 + $16,000) / $16,000 = 2.8. Anything less than 2 suggests the business has too much debt.

7. And your personal finance?
Good personal credit can help with a business loan, especially since many small business borrowers have to guarantee the loan personally.  Conversely, some missed payments or other credit problems could become an issue. Straighten things out to show you are in control before seeing the bank, as this can make a difference when signing that business loan application.

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Published on Tuesday, May 14th, 2013, under Latest News