You need a business loan but will the bank or other lending agencies give you a favourable one? This is one question that is often asked by business owners. Sometimes it is hard to get a loan but with these seven tips, we hope to make the process easier and perhaps a little more successful.
Tip 1: Know your worth
Before you apply for a loan you need to know how much your company is worth. What assets does it own? And what liabilities does it owe? If you are a sole proprietor, you should check your credit record too. You could also do a business credit check. Other items to get in order are your income statement, cash flow statements and balance statements.
TIP 2: Do your research
There are many different kinds of loan agencies available. You could loan from a bank or a specialist loan agency. Here are three points to consider when doing your research:
- Which industries does the agency service? Some agencies may provide loans for certain sectors.
- How much do you want to loan? The amount you want to loan may affect who will be willing to loan that amount of money.
- How fast can an application be approved? Some applications can be done in a day while others may take a few weeks.
And any other questions which may be important to you when you choose a loan agency.
Tip 3: Educate yourself
When taking out a loan, the loan agent will want to make sure you understand what you are agreeing to. If you don’t clearly understand some of the basic terms used in business loans, your chance of getting a loan will be lowered. Here are five basic terms that you need to know:
- Balloon payment: This is a type of loan where you pay small loan amounts over a couple of months with the last payment being larger than the previous amounts to finalise the loan.
- Default: This is when you don’t pay the monthly amounts for your loan.
- Financial covenants: These are the agreements between the lender and borrower which state what the borrower must and mustn’t do to maintain their creditworthiness.
- Loan-to-value ratio: This is a ratio which compares the amount of the loan to the value of the asset being purchased. A loan with a high loan-to-value ratio is considered high risk and may incur a high interest rate.
- Personal guarantee: This is a commitment which a partner or owner of a business makes. When a personal guarantee is implemented, it states that should the business be unable to pay back the loan then the partner or owner will need to pay it in their personal capacity.
Tip 4: Create a negotiating strategy
When you go into negotiating your business loan, you need to ensure you know what you will compromise on and what is non-negotiable. By knowing this beforehand you will be more confident when you go into the negotiation.
Tip 5: Limit the personal guarantee
Where possible you want to make sure you limit how much you would personally have to pay should the business struggle to pay back the loan.
Tip 6: Bargain over pre-payment
As the loan agencies receive interest on the money they loan you, they may not be keen on you paying it off earlier. Many agencies may even make you pay a penalty if you choose to pay the loan off earlier. Therefore it is crucial to negotiate a good prepayment deal.
Tip 7: Get it all in writing
Many people may forget what they said, so you must get the negotiation in writing. This will ensure that you have something to reference if you are unsure about the loan agreement and you will be able to go back to the loan agency if they do something different to what is written on the agreement.
By following these seven tips you will be well on your way to negotiating yourself a better deal.
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