Requesting a business loan for your small business, whether you’re starting a new one or expanding your existing business, may seem daunting. However, there are a few small steps you can take to ensure your success in obtaining that loan.
It’s important to understand that business loans are significantly more difficult to obtain than a car or home loan because the stakes — the success or failure of your business — are much higher. Whereas cars and houses are physical assets that the lender can repossess and sell fairly easily if it becomes necessary, a business poses a much bigger loss.
If your business fails to repay the loan by the due date, all the lender can do is grant further, temporary funding in the hopes that your business will reach the point of repayment soon, restructure the loan to lessen the demands of repayment or call in the loan or foreclose on the business — none of which particularly benefit the lender. Therefore, lenders will likely require you to meet specific criteria:
1) Good credit history. A lender can only grant a loan to someone who appears to repay money on time, and the best way to determine if failure to repay is a possibility is to review your credit history and factor in various considerations. Generally, your credit history has to be extremely good to qualify for a business loan.
2) Equity. You have to make a financial commitment to your venture as well, to prove to the lender that it’s in your best interest to pursue the success of your business and repay your loan in a timely manner.
3) Clear business plan. You will have to present the lender with a clearly drawn, carefully researched business plan that comprehensively describes your business and its market, demonstrates awareness of its competition, lays out employment and management plans, accounts for how the loan will be used and offers supporting documents like financial statements and credit reports. You will also need to provide estimates of your business’s cash revenue, income, summarized expenses and balance sheet.
4) Previous experience. The more experience you have in owning or managing the type of business for which you’re requesting the loan, the better. Lenders prefer you to have at least three years of experience to be certain you can manage the loan responsibly and run the business well.
5) Collateral. In addition to providing equity, you usually must also pledge an asset of value — up to and even more than the loan principal — as security that the loan will be completely repaid, including interest. The lender will determine the value of collateral required depending on the amount of risk assumed and the amount of any loans already in progress. Borrowers often put up property, inventory, savings or stocks as collateral.
If you approach all five of these requirements clearly and thoughtfully, you can show your lender you are well prepared to manage a loan efficiently and successfully. For further guidance on this important issue, speak with an experienced lawyer.
BoltNagi is a well-established and widely respected corporate and business law firm serving clients throughout the U.S. Virgin Islands.