Whether you are starting a business or expanding the one, financial capital is the one thing you would often find lacking. Your current reserves and income generation is only enough to meet the day-to-day business needs and other business obligations including taxes and salaries. So, what are the available options that can help you with your desired business target? You can wait for some years to garner some savings that you can invest in your business later on or you can apply for a business loan today. A business loan is usually the best bet in the business world. You get enough capital in a limited period of time that can, in some cases, save you and in other cases help you grow rapidly in your specific domain. One glitch in this business loan scenario is the terms and conditions. Most often than not, if you are applying for a business loan you will have to agree to the terms of your lender and will not have much say in what, how and when of your loan agreement. How can the terms of a loan agreement be arranged in your favor? It seems like a mammoth task, considering you are borrowing something and also want to place a condition that you will return according to your convenience. Fortunately, it is not unconventional and difficult in the business world to obtain a business loan on your own terms. You just need to be smart in your trade and be knowledgeable about the loan conditions and agreements. This article highlights 10 tips that can help you obtain a business loan on your terms.
1. Breakdown Loan Requirements
If you breakdown your loan requirements, you come off as someone who is serious about business and the agreement. Once you have clearly identified what you need the loan for, you can present your requirements to the lender. The lender will then know what exactly you are going to use the amount for. Alternatively, if you present your loan requirement as a lump sum, you will weaken your case in front of the creditor. Anyone who is lending you money would wish to know where that money is going to be spent and how you plan to return it. If you start off with a weak plan, you damage your chances of being in the creditor’s favor. Breaking down your loan requirements is a solid start when it comes to making the creditor agree to lend you capital on your terms.
2. Research the Lenders
It is critical to know the institution or the bank that you’re going to reach out for a business loan. Every lender or creditor has different terms and conditions in case of lending and loan repayment. Therefore, it is best to do your homework before preparing a loan application. Another thing you should keep in mind is that if you are applying to multiple lenders, you should modify your loan application accordingly. Some broad stipulations remain the same across the board when it comes to business loans, but every creditor has various limitations and different work practices. So, it is best to do thorough research on the creditor you wish to reach for the financing. That includes going over the previous loan agreements of the preferred creditor, if available. You can also try to establish contact with businesses that previously had a business relationship with the said creditor. Having background knowledge and a good understanding of the lenders will be instrumental in having a favorable loan agreement.
3. Prepare Proper Documentation
Once you have identified the lender/s you are going to apply for a loan, then comes the preparation of the documentation. As mentioned earlier, it should be a lender-specific application. Therefore, prepare your documentation according to the requirements of the creditor. Some broad points that should be considered while preparing documents for the application loan are:
- Name of business should be clearly stated without any spellings error.
- The business credit report for at least past 2-3 years.
- The loan applicant’s business and personal credit history.
- Tax ID.
- The tax returns.
- Amount of loan along with details of the purpose.
- Financial statements of business and business’s shareholders.
- Projected financial statements.
- Bank statements.
- List of executive officers.
When you have already outlined the essential details for the scrutiny of the creditor, there are great chances that the creditor will give you and your application due attention and time. Proper documentation is the key step in convincing the lender to agree to your term loans.
4. Have A Good Credit History
It cannot be stressed enough that you should have a good credit history when applying for business loans. If your credit history is poor, your chances of having a loan approved on your terms will go down the drain.
- A creditor thoroughly scrutinizes the financial statements and personal and business credit history of the loan applicant.
- If your credit history is below 700, your chances of securing a loan are slim to none.
- A credit score in the range of 600-700 may work if your current and past financial statements along with projected financial statements present a promising outlook.
- Debt to income ratio is also considered and if it falls in the favorable scale, your chances of securing a loan from your preferred creditor also get a boost.
Time in business and business cash flow are some of the other factors that are considered by the creditor in addition to credit history. If your cash flow is positive and consistent and you have been in the business for 2-3 years with consistent performance, the possibility of loan on preferred terms becomes enhanced.
5. Orderly Financial Statements
Keeping your financial statements in order may seem an unimportant task for some but it is highly essential in three scenarios. When you have to pay your taxes, when you are applying for insurance claims and when you are applying for a loan! The financial statement is thoroughly screened by lenders. Therefore, it is advisable that an accountant is tasked with getting the financial statements in order before they are presented to the creditor. If you are applying to a top-notch creditor, it may be the case that their enterprise will require your financial statements to be audited by a certified accountant. So, be prepared to incur the cost of such. Well-organized balance sheets and carefully outlined cash flow statements including accounts payable and receivables will beef up your loan application in the eyes of the creditor.
6. Good PR With Loan Officers
It is not always the creditor who can help you in securing a loan. It is in your benefit to develop good personal relations with the loan officers. It does not imply that they will be disloyal to their employer and will gain you inside favors. Having good PR with loan officers entails that you can gain knowledge on the best time to apply and also about the preferences of your creditor. You can thus prepare your loan application accordingly. Loan officers can also help in arranging an impromptu meeting with the creditor in case anything urgent comes up at either end. This kind of arrangement works in favor of both parties.
7. Consider Providing Security or Collateral
If you can provide loan security or collateral for the loan, you can make the creditor draft the entire loan agreement according to your terms. A collateral is a surety for the creditor that any amount they are lending can be sourced by liquidating the assets presented as collateral. The amount lent by the creditor is safe in case you put up collateral in your loan agreement and you can make the creditor agree to an interest-free loan payment or payment over a period of time suitable to your business plans.
8. Analyze the Proposed Loan
It is in your best interest to analyze the terms of a loan agreement before finalizing it. Every creditor will present their terms to you when you apply for a loan. You should apply to multiple lenders and then analyze the proposed terms from all the lenders. Out of these, you can select the one that aligns best with your business targets and your ability to pay back the loan. You should never consider one creditor for your loan and neither should you have too many options. Where one can result in a bad deal, the latter option will result in the loss of valuable time and resources. Select 3-4 creditors and analyze the proposed loan agreement presented by them and go for the one that suits you the best.
9. Keep Bookkeeping In Order
If you do not have an accountant to manage your accounts, consider hiring one. However, if your budget does not allow a full-time accountant, you can opt for hiring the services of the one to just organize your bookkeeping before you apply for a loan. Alternatively, if you or any other employee is good with accounting software, you can try using such software to put your bookkeeping in order. The accounts are thoroughly scrutinized by the lender and it will not bode well for your case if they are not in an orderly fashion. If you cannot keep your accounts in order, the lender may doubt your ability to repay the loan. Therefore, make sure you either acquire an accounting software or hire an accountant.
10. Active Personal And Business Online Profile
You ask for a huge loan from someone and they just lend it to you without knowing much about you or your business. That does not really happen in today’s business world. A lender does not only thoroughly screen your accounts, financial statements, and credit history but also does perform professional and personal scrutiny before approving the loan. You should have an active online presence, in terms of your business as well as on a personal level. The creditor should be able to have a basic understanding of you as a person and of your enterprise as a business entity in the market. Make sure it is updated and honest. This will improve your case and desire to have a loan on your terms.
Do thorough research before applying for a loan so that you can identify a lender who can give you the best deal that matches your set of requirements. Following these 10 tips can be your starting point in preparing the case for your next business loan.