HERE’S ALL YOU NEED TO QUALIFY FOR A BUSINESS LOAN
In the current era, running a business is not as simple as in the earlier days. Due to these economic turmoil times, businesses are facing constant pressure of low commercial activity and a decline in consumer purchase rate. In its nature, business is the name of handling loads and getting the rewards out of it. Entrepreneurs need to manage a lot of matters at the same time to keep the ship afloat. They need to cash out receivables on time, settle payables, disburse salaries irrespective of the amount of profit earned, keeping the production up along with managing its financial matters. Hence, it is not an easy job.
Yet, many people opt to choose businesses over employment. There are some advantages and disadvantages in every mode of work, but some reasons motivate and keep an entrepreneur going. Some of them include bringing their business idea to the market, providing employment opportunities, produce products of their own choice, avoid the prevailing trends of the workplace, etc.
That’s why most of the business people aspire to expand their activities and business scope. And therefore, they need to think for more resources, more possibilities, and more outcomes. One of the primary resources that are required for the expansion of businesses is capital. Without a substantial amount, it is difficult for any business to grow beyond its current setup. Mainly, the capital required for expansion is usually invested in research and development, increased production setup, extensive marketing, or improving the supply chain of the business.
However, acquiring finances is not simple, especially if we are considering bank loans here. One must need to go through many procedures and legal setups to qualify for it, as banks need assurance their money is in safe hands as well as recoverable. Similarly, the incident of getting an unsecured loan from the bank is quite rare since several trusted sources are available with their secure services.
There are many requirements to be fulfilled to get a loan. Every bank or state has its own set of protocols and documentation requirements before lending capital to any business. Therefore, there are no specific standards out there to be followed, but let’s explore the necessities that every bank needs.
- COLLATERAL ASSET:
As discussed above, banks require something as their recovery asset if a borrower fails to pay back. Therefore, banks ask for some valuable asset almost equal to the value of the finances they are lending. Typically, they look out for any land, machinery, or equipment as the collateral assets. In some cases, they pick Accounts Receivable or Inventory as collateral too, but in such instances, they determine the real value of them. For example, the value of the inventory is calculated without excluding obsolete or slow-running stock. As a requirement, businesses are not allowed to sell the collateral asset in the lending period.
- CONCRETE BUSINESS PLAN:
Every lender would be interested in understanding the primary purpose of debt financing required by the business owners. To ensure that their lent money would be secure and expected to redeemed on its committed time, banks usually demand a feasibility report or business plan document. Such a document typically includes cash forecasts, anticipated profitability, asset position, market share, etc. It is recommended that the business must prepare such documents in advance before the bank asks for these requirements.
- FINANCIAL STATEMENTS OF THE BUSINESS:
Financial Statements of a business reflects the accurate picture of business performance and prospects. Typical analysis and comprehensive review of financial statements can also determine or predict future forecasts and performance overview, which is useful for the banks to decide whether it is favorable or adverse to assist such business.
Financial Statements contain multiple documents, each determining different aspects of the business. However, for evaluation and assurance, banks typically more interested in profit and loss statements (also called PnL) and balance sheets. The profit and loss statement reflects the operational performance of each year. It provides details about revenue, gross profit, operational expenses, and the bottom line, i.e., net profit. Whereas, the balance sheet provides insights into asset position, long and short term liabilities, and capital (with the distinction of owner’s equity and already acquired debt financing). Banks usually analyze such documents with different tools like accounting ratios, comparative analysis with industry and competitor, etc. to finalize the lending decision.
Additionally, since the company itself prepares these documents, typically, banks need third-party audited financial statements to enhance the credibility of reports and to minimize their risks. In some countries, it is a standard protocol for a public or private limited company to get their financial statements audited by the approved third-party chartered accountancy audit firm. However, such requirements are flexible for small business owners for the time being.
- PERSONAL INFORMATION OF THE OWNERS OR MAJOR SHAREHOLDERS:
In the eye of the law, a corporation or company is a separate legal entity, and its shareholders or directors are separated from it. They are only managing and running a business. Therefore, in case of failure in payment, banks cannot demand or ask for the shareholders’ assets to repay the losses. To verify the conflict of interests of the owners and for the background check of the directors, banks can demand the asset and liabilities details of the directors or significant shareholders. It can also include investments, tax returns, mortgages, etc.
- AGREEMENT ON CERTAIN DEMANDS:
In case of a handsome amount of debt financing, lenders can ask for certain conditions to be fulfilled while running the business in the lending period. It is called the loan covenants. Such steps are only taken when organizations are lending to high-risk businesses. Therefore, businesses need to weigh their options and do due diligence as such interference can simply hamper their ability to run their business in their manner.
As discussed already, business is the name of taking risks and making the decisions with maximal benefit forecast. Therefore, decisions like acquiring debt financing need to be evaluated and analyzed thoroughly before execution. Once decided, every step of the loan acquisition process should be followed along with following all stated protocols of the lending organization.