Being an entrepreneur, you can finance your business in different ways. However, the two most popular are through equity or debt. Raising capital via equity is both difficult and a lengthy process. This is why many business owners prefer to obtain the money they need by taking loans. They also enjoy certain advantages by taking this course of action. They find it convenient and have multiple options to choose from. As the competition among financial institutions is high, they can get such funds at nominal rates of interest. In some cases, such proprietors can even avail tax exemptions from the government when they opt for this mode of financing.
Prominent financial experts say entrepreneurs need to conduct thorough research before deciding what type of loan to opt for. They need to assess the needs, the amount they require, and their ability to repay such dues. Only then should they approach lenders who are willing to give them the money they need. This goes a long way in ensuring they do not end up accumulating more debt than they can handle. Such a situation can do more harm to them than good. It has the potential to ruin their businesses and reputation in the market. This is something they do not want at any cost.
What entrepreneurs need to understand about obtaining financial loans?
Entrepreneurs need to understand financial institutions incur risk when they sanction loans to them. The officials running such organizations need to be absolutely sure of their borrowers’ ability to repay such sum. The last thing they want is to write off the entire amount they lend as irrecoverable. This is a loss they are not willing to incur. This is the reason why they lay down stringent eligibility requirements. When you approach them for such funds, they normally ask you to submit certain documents. They will scrutinize such papers before taking a decision on whether to lend you the money or not. These are as follows:
- Your personal tax returns for the last three previous years along with the current one;
- Business tax returns for the same period;
- Balance sheet and income statement of your business for the last three years;
- A statement showing your personal income, expenses, assets, and liabilities;
- A statement indicating the amount of money you need; and
- A schedule of your accounts receivable and payables.
Such professionals go on the explain that entrepreneurs need to consider the following five important factors before approaching lenders for funds:
1. Determine how much money you actually need
You need to know how much money you require to operate your business. This is why the institution you go to asks you to prepare a statement of financial projections for at least three years. It allows the people are running the organization to determine how you will use this money and the profits your likely to earn. After all, they are taking a risk by lending you the sum. They want to assess your ability to repay the amount and the return on this investment.
2. Cash flow
You may have to give this lender a copy of your cash flow statements for the last three years. The officials of the financial institution you go to may ask for such documents in certain circumstances. The experts from esteemed companies say that they do this when they feel you do not have enough assets. They will take a good look at your monthly expenses and corresponding revenue. If your incomes are greater than your expense, you have no problem repaying the loan amount. Moreover, the money you obtain can help you to overcome a short-term cash crunch.
3. Show your business plans
If you need the money to expand your market operations, prepare a necessary business plan. The officials of the financial institution you go to obtain this loan may want to see it. This will give them an idea of what you are going to do with the funds they lend you. If they have no objection to the financial feasibility of your business proposal, they will give you the money. However, they will clarify their terms and conditions to you.
4. Shop for such lenders
There are many financial institutions in the market. You should take your time to shop for an organization that supports your needs. You can opt to visit local branches of such establishments for the money you need. The people may be willing to lend you such an amount if you fulfill their eligibility criteria even if they have to incur unnecessary risks. You may also use a small business loan calculator to make yourself aware of the amount you need to pay even before you apply for a loan. They may not even ask you to provide a personal guarantee. However, whether or not they will take this course of action depends upon the type of relationship you build with them. You should not hesitate to ask what other facilities they are will to give you if open an account in their organization.
5. Prepare a personal guarantee
If you own a startup concern, the officials of the financial institution you go to may ask you for a personal guarantee. This collateral secures the risk they take when they decide to lend you the money. In the worst-case scenario, if your business fails you may default in your loan repayments. In such a situation, they can recover a portion of the sum they lend you from your personal assets. The rest they may have to write off as irrecoverable. Even if they feel your organization is not making sufficient profits for the last three years, they may resort to this course of action.
Securing a suitable loan from a reliable financial institution is an ideal way to fund your business. You will have the money you need to operate your organization efficiently. However, you also are incurring an element of risk if you opt to take this course of action. The last thing you want is to accumulate more debt than you can handle. This can harm your business in the long run. This is why you should seriously consider the above five factors before making a decision.