BY DANIE BEZUIDENHOUT
You can’t start or grow your business without funding. Unfortunately, applying for and getting a business loan isn’t a fast or stress-free experience.
Applying for a loan is one of the most crucial steps for any business owner. To give yourself the best chance of getting approved, follow these tips for negotiating and ultimately getting a business loan.
Do your homework and go to the right banks or finance houses.
Research finance houses before applying for a loan. Like doctors, banks have specialities. You should find banks that are able to help you – don’t waste your time applying to banks that can’t.
Some institutions are good at restaurant loans and some are good at manufacturing loans, but many lenders reject those categories. Start by looking up every institution in the county and begin investigating them, starting with the smallest, they often offer a more personalised and flexible service.
Strongly consider seeking capital from multiple sources. In any negotiation, it helps to have options as each institution tends to have its own risk factors built-in, depending on their exposure to any particular industry.
Know the terminology.
Bankers and lenders won’t take you seriously if it seems like you’re unprepared or unsure of what you’re talking about.
Speaking the same language as your lender demonstrates that you understand the process and your responsibilities, increasing your lender’s confidence in you. This can also help you spot warning signs that a potential lender may not have the experience you need or may demonstrate predatory lending behaviours – either of which can result in a loan that’s poorly structured, with repayment terms that jeopardize your business’s cash flow.”
Before you apply for a loan, here are some terms you should familiarize yourself with.
Balloon payment: This is the unpaid balance due at the end of a term loan for loan types that don’t fully amortize over the term of the loan. The balloon payment is due at the end of the loan to pay the balance in full.
Default: is defined as “failure to make the agreed-upon periodic payments on a loan.”
Financial covenants: These are financial guardrails within which you need to operate your business. If you go outside these, you’ll be in default under the loan and the lender can demand immediate repayment. Financial covenants may include a minimum cash balance in your bank account, a minimum level of profitability and asset coverage of cash-flow or gearing ratios. Covenants are often used to control advance values on book debts and during a slow period of trading overdraft limits may be reduced at a time when it is most needed.
Loan-to-value ratio: This is the ratio of a loan to the value of the purchased asset. It’s one of the metrics used to evaluate the risk on a potential loan. It varies based on the asset type and the perceived forced sale value of such assets. Property loans are considered based on zoning, with residential property perceived to be less of a risk and can be financed over 20 years and commercial property only 10 years.
Personal guarantee/surety: If you personally guarantee a loan, that means not only is your business on the line, your personal assets are also at risk. The capital source could come after your house … Try to avoid a Personal guarantee as much as possible. You have the right to question why it is needed.
Preparing for a business loan is like dressing for your wedding. You want to look as attractive as possible and present yourself as a good risk.
While you need to speak the part, so does your paperwork. An updated business plan or business proposal is key to any application supported by a cash flow projection which demonstrates the need for funding and critically repayment ability.
Try getting copies of your credit report to identify any negative items and try to repair or remove them. Have a letter of explanation prepared for any negative items that remain and what arrangements are in place.
You should also have your tax return or tax clearance certificate, three years of fiscal year-end financial statements and year-to-date financial statements.
You should prepare a personal financial statement listing your assets and liabilities. Remember to include your income and list of expenses, be honest baking systems show exposure across all finance houses. Have copies of up to six months of bank statements if you are approaching a new bank, a list of your life insurance policies and any trust information, and any recent appraisals you have had done.
Before you arrive at the bank, make sure you and your paperwork are organized and neat. Neatness, grammar, spelling and organization count. Sloppy requests don’t even get read and are often rejected immediately.
Try to limit personal guarantees.
Business owners should be wary of the personal guarantee. Many small business loans require a personal guarantee to serve as collateral for your loan. A personal guarantee may make sense in some instances, but it’s a tool you should be aware of before signing a loan agreement.
Instead of taking business property as collateral (which the lender may already be doing), the lender may also ask for a personal guarantee, which means that in the event of default, your personal assets can be seized to reconcile the debt. If your lender requires a personal guarantee make sure it is limited to the amount of your borrowings or asset funding. Don’t ever sign a loan agreement that you feel will put your personal financial situation in jeopardy.
Negotiate a right to prepay.
While it may seem counterintuitive, many lenders charge you a fee if you pay off your loan in one lump-sum payment. This is because, depending on your loan agreement, if you pay off your loan upfront, the lender collects less total interest. Variable interest rates can fluctuate, and even fixed interest rates are charged on the remaining principal. As your loan matures and amortizes, the amount of interest you pay each month will be a result of the remaining principal. If you pay off the total principal and interest up front, you’re not making future interest payments to the lender, which affects its balance sheets and total interest collected. You will also be paying less interest overall.
Always try negotiating a prepayment option so you can pay off your loan immediately if you have the opportunity. This tip comes down to flexibility: You want to be able to be as financially nimble as possible. The option to pay off a loan in one lump sum means you can quickly attain financial freedom if you have the opportunity.
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