Getting A Business Loan From A Bank: What Steps Can You Take?

. 6 min read
Getting A Business Loan From A Bank: What Steps Can You Take?

Getting a business loan can be a hectic task. One of the most common questions that arise is how to get banks to say yes to your business loan. Almost four out of five business plans with projections miss the mark in several critical areas in the banking industry. Business plans that are made up of short bullet point lists do not provide the detail or context needed by banks to decide whether to provide credit to a business.

Businesses seeking financing, startups, or fast-growing companies must prepare business plans before getting financing. The tools are useful regardless of a business's size, but specifically for startups because they lack a track record of financial success that a bank would be able to examine.

The business plans of established companies seeking to grow quickly often require funding for operations, equipment, and real estate, and the plans must identify how the company plans to grow and show that the strategy will generate sufficient financial resources to repay any loans they seek.

If a company is seeking financing for the acquisition of another company (or if an individual is seeking financing for the purchase of a business), a detailed plan is required to illustrate the ownership change, how the management will be successful, and what the client base will be. Continue reading this article for more details on how to get banks to say yes to your business loan.

Banks And Your Staff Need A Business Plan

It is important to have a strategy beyond what is required for securing a loan. However, it can also be a tool for communicating critical information to employees and management, such as a guiding document. Creating a business plan is a great way to help business owners plan for the long run.

There are several components that a good business plan must possess. The following law applies to both SBA (Small Business Administration) loans and conventional loans:

managers team working with new startup project in office and notebook on wood table

1. Specific Projections

If you seek a loan, lenders need sufficient information to determine if the business will be profitable and its cash flow will be sufficient to repay the loan. Rather than focusing on just the next couple of years, a business plan should show how it is expected to achieve its revenue targets and estimate expenses. In addition to saying, "my company expects to receive 5 per cent of the $100 million markets for my product or service," your banker also wants to know how you will achieve this level of revenue by describing how it will be achieved through key relationships.

As well as analysing the expense of operations, the business plan should analyse trends in the economy and the market. For example, if the local labour market is constrained, you should let your banker know (they probably know already) and explain your plans to hire staff and, when your company grows, how those factors will affect your labour costs. This document is intended to help you identify the key assumptions you are making and to explain your reasoning.

2. The Marketing Plan

Detailed information should be provided in the plan about the company's marketing strategy. Interested banks want to know about the business's marketing strategy as well as the specific gaps it hopes to fill before investing capital. It should address the following questions: What are the plans for reaching out to the local community about its products or services?

3. Ownership And Management Experience

A bank wants to confirm the owner has the required experience and background to run the business. The banks can then feel confident that their projections are properly considered and will be executed properly. The kind of business you run determines the kind of skills you need. Managers who have extensive experience in big companies may not be ideal owners for a restaurant.

Banks will be more comfortable working with a business owner who has demonstrated experience managing costs in an industry with high volume and low margins. Detailed information on the management transition plan is important when looking at acquisitions of businesses.

4. The Location Is Everything

A small detail about a company's physical location can play a surprising role depending on its business model. Coffee shops and breakfast cafés should be situated along with the road people use when they commute in the morning. Especially if the restaurant relies heavily on passing cars for customers, it should be accessible.

Despite the reputation of "destination" businesses, location can still play an important role in attracting customers. If you own a luxury beauty salon, you would not want to open a shop in an under-the-radar strip mall. Your business plan should state where your business will be located and why that place is appropriate for the type of business you operate.

Adapt word cube on wood background

Adapt Things To Their Tastes

Small businesses are provided with free or very inexpensive expert assistance by SBA-supported programs for entrepreneurs who cannot create a business plan independently. Service Core of Retired Executives (SCORE) is an organisation that helps clients in forming an action plan by calling on the experience of its volunteers. Additionally, Small Business Development Centers offer a wide range of services and databases to assist you with your planning.

Banks, unlike investors, are most concerned with ensuring capital return, not capital appreciation, when extending credit. The likelihood of getting needed financing increases if the company has a plan and shows the ability to pay off debt.

Also read:

1) What is a business loan? How to apply for a business loan?
2) Home Loan: Steps to apply, Best Interest Rates on Home Loans & more
3) What is Business Loan? A Complete Guide.
4) How To Get Small Business Loan From Government?

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Q. What is the formula for calculating my loan eligibility?

Ans. The following are the primary factors that determine loan eligibility:

1. In the case of a partnership or a director or owner of a borrowing entity, the entity’s credit rating will be reflected in the CIBIL or Equifax report or any other credit bureau. An acceptable credit score is a necessary but not sufficient criterion. In a borderline case, the bank may restrict the loan amount based on a subjective criterion.

2. Financial statements for the last two years of the borrowing entity. Several parameters determine the loan amount, such as turnover, partner salaries, depreciation, interest costs, and net profits after tax.

3. The debt service coverage ratio (DSCR) indicates the ability to service the EMI for the current loan. Banks generally request DSCRs between 1.0 and 1.5 depending on the situation.

Q. Is pre-closing allowed for business loans?

Ans. Banks have lock-in periods ranging from 6 months to a year, but some allow you to pre-close after your bank has deducted your first EMI. It may also be a restriction that you can only use your own funds (not the balance transfer check of another bank) to clear a loan. Furthermore, banks may allow pre-closure for no charge or charge a fee (2-5% of the pre-closed amount). Please consult the loan advisor of ours or the bank regarding all these factors before signing anything.

Q. Having a business loan, what are my repayment options?

Ans. If you want to repay with post-dated checks, electronic clearing service (ECS) or direct debit, you can do that as well.