When it comes to starting up or keeping an SME (small and medium size enterprise) running, one of the most important things to have is the necessary funds. However, getting a loan isn’t always as easy as it seems. Some lenders are very strict with their requirements and others can take months to even process the application. Therefore if you’re looking for a better way to fund your SME, it’s important to understand how to appeal to banks. While a good business plan is a great start, the tips below will give you more information about how to make this a successful transaction.
1. Can You Answer the Bank’s Questions?
Bankers will want to know a lot of information when you come to them for a loan. If you aren’t prepared and ready to answer their questions, this could affect your chances of getting that money. Some of the most common questions they’ll ask you from the start include:
– How much money do you want to borrow?
– What’s your plan for paying back the loan?
– How will the money be used?
– When do you plan on paying back the loan?
2. Pre-Determine Your Collateral Source
Before you walk into the bank manager’s office, you need to determine what your collateral is going to be. If you’re new to this, then collateral means the assets that you will put up for the loan repayment. For example, let’s say you put up your company’s inventory as your collateral. If you were unable to pay your loan and defaulted, then the bank would be able to acquire that inventory and sell it for cash to satisfy your loan. While business assets are the first that most company’s pledge, others use their personal assets as their guarantee instead.
Once you arrive to the bank, be prepared for the discussion about your collateral or personal guarantee source. If you choose to do a guarantee, then try to make it for as little time as possible. One renewable year is generally recommended so you can use different collateral later on if needed. One additional thing to keep in mind with a guarantee is that you shouldn’t use a spouse or friends unless they are involved in the business. Otherwise this will leave them liable if you default, which can put them in financial distress. If you can, try to get multiple guarantors to help divide the loan amount between more parties.
3. Estimate the Amount of Money You Need
Although it might seem ideal to ask for less money because it can help increase your odds of being approved, this will not help you in the long run. If you didn’t borrow enough, then you may not be able to make the moves necessary to get your business profitable like you need it to be to pay back the money. To avoid borrowing less, take time to closely review your finances and what it will take to accomplish your goals. By doing so you’ll anticipate the proper amount so you can get the business loan for the right amount the first time.
4. Build Business Credit
While you might be tempted to open a personal credit card to fund items you need for your business, this doesn’t benefit your company’s credit. Instead, open up a business credit card as well as business checking accounts as soon as you can. Once you do this, you will begin proving your company’s credit worthiness.
While business credit is important, you should also keep an eye on your personal credit history. If it has been a while since you checked it, then do yourself a favor and pay for a full credit report. Lenders are likely to look at this, especially if you have a business that’s under two years old, as those are examined more critically than those that have been around longer.
5. Prepare and Review Financials
A week or at least a few days before you meet with the bank, print out financial papers and review them. By becoming more familiar with the financial information you’re using to get this loan, you’re more likely to have a smooth appointment with the lender. You’ll answer their questions, ease their concerns, and be on the same page as them so they feel more confident approving a loan.