This week’s guest post is from Catherine Palmer, a web designer sharing tips for how entrepreneurs can set themselves up for success when pursuing a business loan.
Financing a new business venture is one of the biggest and most common challenges facing any entrepreneur today. Sometimes it can feel as if there are no viable financing options for a business, but this is rarely the case. In fact, there are more funding options for businesses today than there ever have been in the past, you just need to know where to look for them.
Of all the options available to you, a business loan will offer an excellent balance between quick access to the loan cash and the freedom and flexibility to decide for yourself how to best put it to use. When you are applying for such a loan, there are a number of things you can do in order to enable yourself to secure more favorable terms much more easily.
Show Other Capital Investment
As a business begins trading and growing, it will begin taking on more and more capital. This money can either be money that you have invested in the business yourself, or it can be cash that has come from earlier investors. In either case, other potential investors will usually feel much more secure investing in a business that has successfully raised capital from other investors or from your own personal funds.
It doesn’t matter where previous investment in your business has come from; the fact that you can show that the business has had that investment is what matters. When you apply for a business loan, being able to illustrate clearly to a would-be investor that you have already successfully gone through this process before will raise their confidence in you.
If you can show them that you have been willing to invest your own money into the business, this demonstrates confidence on your part and a strong belief that you have a viable business on your hands.
Get as Much Cash Flow as Possible
The more cash that you have coming into the business, the stronger your business will be considered to be. Any experienced entrepreneur will know that there are many important metrics that need to be considered when trying to accurately establish the health of a business. But among these, the amount of money that a business is bringing in, and how much of that money translates into profit, are among the most telling and most reliable indicators of how well a business is being run.
Any potential lender who can see that you have a strong cash flow will be more inclined to lend to your business because they can be reasonably sure of a faster return. Not only will a quicker expected return to the lender translate into more favorable terms for the business seeking the loan, it can even lead to them being willing to offer you an even more sizeable cash injection.
Keep Accurate Records of Your Collateral
If you are seeking a business loan from the bank, they will look at a variety of different variables when deciding whether it is safe for them to invest in you by agreeing to offer you a sizeable loan. Among the variables they will consider, there is your company’s history, your business credit, your revenue on paper, your business’ balance sheet, and your equity contributions. Assuming that you meet all of the above eligibility criteria, a bank may well be willing to take a chance on you and your business by providing you with the loan you are seeking. However, most banks will also ask for something else to ensure that they will get their money back in the end, and this is collateral.
There are a variety of assets which might be considered as collateral. It is most commonly thought of in terms of physical property, but it doesn’t necessarily have to be. Collateral can be an asset that a lender is willing to accept as a second source for loan repayment. The purpose of offering collateral is that should you fall behind on repaying the cash that you owe, you will instead turn over items of equal value to the loan, and the bank will recoup their losses this way.
Keeping detailed records of your assets and their values will make it much easier to present them as collateral when the time comes. Ensuring that you have accurate and up to date appraisals of the value of your assets will prevent any squabbling with the bank over their value. If you currently aren’t sure what the value of your assets are, it is well worth having an independent appraiser take a look and give you an informed appraisal.
Consider a Personal Guarantee
In some cases, especially with smaller and younger businesses, it might be difficult to offer any collateral in order to secure the loan. In these cases, some lenders will allow you to offer a personal guarantee instead. Under a personal guarantee, rather than offering collateral in case you are unable to repay the loan, you instead accept that if the loan isn’t repaid according to the terms you agree with the lender, you will instead accept personal liability for its repayment.
The idea behind a personal guarantee is similar to that of collateral, but with the difference that, whereas putting up collateral only allows the lender to seize particular assets, if you default on a loan backed by a personal guarantee, any of your personal assets can be seized in order to recover the value of the loan.
Choose the Right Lender
There are multiple potential sources from which to modern business can borrow money, as well as many more ways of finding those sources. Entrepreneurs have never had so many options to choose from when trying to decide which of these sources are the most suitable for their needs.
As well as the traditional methods, such as taking a solid business proposal to a bank and trying to convince them you are worth lending to, crowdfunding is a great example of how new technologies have further diversified the range of borrowing options available today. However, it is far from the only new type of funding worth knowing about. As time goes on, more and more business owners are turning to lending marketplaces, which make it easier for small businesses to secure funding when they most need it. Lending marketplaces streamline the application process and connect small business owners to a network of lenders. Among these, Lendio is the biggest lender in the USA, having facilitated $750 million in loans.
Securing the best business loan possible will depend on a number of factors. Not only will you need to ensure that you are prepared properly, and in a strong financial position to encourage lenders, you also need to make sure that you apply for the right type of loan, from the right type of lender.
Although web design is Catherine’s first passion, productivity, business management and career development in this digital age are topics she is quite interested in lately. Catherine has been researching and learning for some time now, and she is always happy to share her knowledge and inspire entrepreneurs, business owners and everyone interested by writing some quality content.