How you can pay back a loan is the most important thing that lenders will want to know. As a new entrepreneur, it can be difficult for you to prove your ability to repay or “service” the loan. Randall Castillo Ortega, an entrepreneur and the founder of SME investor RACO Investment in Costa Rica and Panama, provides insight into how businesses can secure funding.
Make sure to put your finances in order and provide comprehensive financial details in your business plan. Don’t overdo your expectations, be realistic. If you have been in business for any period of time and can prove that your profits exceed your expenses, have your proof at hand.
Expect to guarantee the loan personally. States Castillo, “Entrepreneurs do not always have enough adequate assets in their businesses to secure a loan. Therefore, lenders require a personal guarantee from the business owner and any co-complainant or additional guarantors.” This means that you (and perhaps cooperating partners, friends, or family who insure the loan with you) will have to pledge personal assets as collateral in case you are unable to repay the loan.
Be aware that it’s not just about business. Lenders will calculate the “total debt service,” and this means your ability to pay all their personal and commercial debts. The co-demandor’s role becomes more important if the owner of the business has a lot of debt.
Be honest about your financial situation. Not everyone has perfect credit or financial records. Share details about any current or previous problems that could negatively affect your application.
Be realistic about how much you need to borrow. Make sure you raise enough capital, whether debt or equity, to launch your business and meet your early working capital needs, but not so much that you can’t pay the payments.
Accept that it is not the responsibility of the lender to provide you with enough money. In all cases, entrepreneurs will have to use some personal finances, and they cannot rely on the lender for all the support of the business. Make sure you have access to additional sources of financing to face unexpected circumstances while you continue to pay off your loan.
Understanding the purpose of a business planning. A business plan can come in many formats. It is important to show that your understanding of the market and your operation is strong, that your communication skills are good, and that your calculations can be used to forecast future financial results.
Basic financial knowledge is essential. While you don’t have to be a financial expert to get started, it is important to understand your company’s finances and understand your financial reports. You can learn the fundamentals of economics from a variety resources.
Learn how to distinguish between different sources of business loans. Each type of financing comes with its advantages and disadvantages, as we discussed in the previous blog. Because banks lend to creditworthy organizations, they can offer lines of credit and low-interest loans. Many small businesses are not qualified for these loans.
Banks also offer credit cards. However, interest rates can be much higher and can increase from 18% to 29% if cardholders do not pay on time. Please find the best source of financing for your business and make sure it compliments your financial situation.
Adds Castillo, “Community development financial institutions are another source of loans for small businesses. Consult with your city’s economic development office, the SBDC of your region, or your bank’s commercial lending department to find out which community development financial institutions are active in small business loans in your area.” Many operate as non-profit organizations and can often be more flexible in their criteria than a bank because they are driven by the mission to improve their communities.
In short, there are steps that entrepreneurs can take to prepare to apply for a small business loan. Demonstrating that you understand your business and that you have done your research are two necessary steps you can take. Be honest about your financial situation, and list co-candidates if your credit history is not strong or does not have a sufficient guarantee.
Prepare a business plan and continuously update it based on changes in business and market conditions. Seek help from mentors or experts if necessary. Finally, borrow the right amount, not too much or too little.