Understanding banks: how to secure funding for your business successfully
Many business owners get frustrated when dealing with banks. Some feel the application process for loans takes too long or is onerous in terms of the information the bank requires. Others are surprised when their application is rejected. However, whatever you feel about banks, at some point your business may require additional funding, so you need to understand how the banks think when it comes to lending money to businesses.
Collateral and securities
Generally speaking, it is very difficult to get the bank to lend you a substantial amount of money unless you are prepared to provide a security against it, which in turn will protect the bank if you default. Some business owners put up their house as collateral in order to secure loans. This is of course a risky strategy and not all business owners would want to take that risk. However, from the bank’s point of view, if you won’t take the risk then why should they.
Other assets which you might offer as a security include machinery, business property, stock or invoices. These are tangible assets and have a demonstrable value, however sometimes banks will accept non-tangible assets such as Intellectual Property (IP) also.
When to apply
Knowing when to apply for a business loan is critical. Leave it too late and your business suffers because of under-financing; apply too soon and you will find your company shouldering unnecessary interest payments. Regardless, it is a good idea to have an ongoing dialogue with your bank so that when you do need to apply for a loan it doesn’t come completely out of the blue. As a general rule, banks dislike surprises.
Other questions the bank will ask
Every bank and many financial institutions offer business loans; the rates and amounts they offer depend on a number of factors, such as:
Do you have a clear and rational business plan for your company, showing projected, realistic cash flows?
What is your credit rating?
Are you a regular payer? (The bank might know your payment history).
What is your business’ profitability and trading history?
What is your stake in your business? You are asking the bank to take a risk, they want to know that you also have something to lose.
Do you know your market and can you convince your provider that you do?
Before initiating negotiations concerning business loans make sure that all the above questions can be answered and that all the available documentation is available to the lender.