Start-ups as well as existing businesses often need funding to help them grow as they simply don’t have the cash to inject into the business themselves. Most companies willseek funding from banks, some will try and source venture capital, others will use their credit cards and a lucky few will receive funding from friends or family.
Before approaching a bank for a business loan however, it is important to know what a bank looks for in a company or entrepreneur when deciding to loan money or not. Be cognisant of these factors and it could greatly improve your chances of getting a loan:
- Do you have a sound business plan ?
- How realistic are your profit projections ?
- Do you have a well researched business concept? Can you back it up with facts and figures?
- What kind of business niche have you targeted? If you do not have a niche then you should be offering something better than your competitors – this could be in terms of service, price or quality.
- What is the current state of your particular business industry? Remember that a bad state may still offer an opportunity to get business funding.
- Who are your customers?
- Who are your competitors? Are you familiar with them?
- Is the pricing you used for your projections competitive/realistic?
- Have you considered your costs carefully? Have you thought of the hidden costs?
- What is your expected return on investment?
- Do you have enough cash to finance your working capital?
- Banks will not give you a loan if you have a bad credit history as the risk of non-payment is high. They will do a thorough credit analysis and will also ask for detailed financial statements and/or details of your personal finances. Be prepared!
- A good credit history is important because you need to have had credit in order to get it!
Surety and Collateral
- Who will sign surety of the loan? The bank will want the source of collateral to be large enough to cover the repayment of the loan if the business goes bankrupt.
- Consider "business partners" or SBDC for assistance in sourcing funding.
- The bank will want a statement of your assets and liabilities so that they can assess which assets could be turned into cash quickly and easily if the need arose.
- A bank will look at the extent of your business experience and the success at which you’ve managed loans in the past. Essentially, they are looking at the overall picture of you as a businessperson.
With regards to financing your business with a credit card, it is not advisable unless the start-up funds are low and you are strict with re-payments. Ideally, you would also ensure that your credit facility offered low admin fees and interest rates.
Venture Capital on the other hand is an area where you will need to impress venture capitalists and have a feasible, solid and professional presentation and business plan. Usually with venture capital, you will need to give up some equity but this shouldn’t deter entrepreneurs as this may be the best way to allow a business to reach its full growth potential.
For those lucky enough to get funding from friends or family, remember to still draw up a loan agreement. Although you may have the support of friends/family, it should still be a business agreement. You don’t want any potential personal issues to get in the way of re-payments.
For any entrepreneur, sourcing funding is never an easy task. Put yourself in their shoes and understand that a financer needs to ensure that their risk of loaning money is low ie. They are 100% sure that they will get the full amount of their loan repaid to them with interest. Also remember to shop around when searching for business funding – compare interest rates at various banks as well as payment terms and conditions. Do your homework and you’ll be a wiser, more satisfied entrepreneur at the end of the day when you get a loan that meets your requirements.
Author: Franchise Finder, Online Directory of Franchises and Business Opportunities in South Africa