Part 1 – BEFORE YOU APPLY FOR A BUSINESS LOAN
Before you apply for a business loan you need to establish or ascertain several things, some of which are as follows:
- Understand your business (Or do you have a business plan?):
Whether you just want to start a business now or have been operational for a few years, you will need to demonstrate a good understanding of your business. One way to do this is by studying the feasibility of your business proposition as well drawing up your business plan. Your feasibility study shows the commercial viability of your business idea whilst your business plan builds on that by showing exactly how you plan to achieve what you set out to. When done honestly and diligently, your feasibility study and business planning are sure ways of forcing you to think through various key details such as funding, commercial viability, staffing, etc. Sometimes, it pays (or its even necessary) to engage consultants who will help you through collating and reviewing the massive details you need.
A good understanding of your business is a pre-requisite for you to stand a chance of getting your loan approved. A word of caution on feasibility study and business planning: don’t ever force your numbers to meet your expectations. This is a recipe for a future disaster. If your study doesn’t justify the commercial viability of your idea, accept that verdict and move on.
- Understand what you need (Or do you really need a loan?):
A good business plan will definitely reveal to you not just the loan amount you need, but also the type of loan that best matches your business situation. For all you care, a good business plan might actually reveal that you do not need to borrow! It is frequently possible for spontaneous sources to fund our business requirements. If however your plan reveals that you do need (external) loan, you then need to be sure what type of loan best suits your condition. Banks offer different types of facilities such as overdrafts, term loans, etc. to meet different funding requirements such as working capital needs or procurement of fixed assets.
Work with your consultant and banker to understand the various types of facilities that are available and assess what best suits your requirements. In understanding what loan type suits your condition, you will also need to know what the lender’s terms (or loan requirements) are likely to be. Different loan types attract different conditions from the lenders.
- Sources of loans/Loan types/Loan requirements:
There are different sources of loans available to the business owner. Sometimes there are actually more sources than we want to imagine. The only issue is how diligent are we ready to be in promoting our case? Informal sources of loans include our friends, family and investment groups. Formal sources are of course the banks (from the microfinance, to commercial, merchant and investment, etc) as well as various government intervention agencies.
The challenge here is be to identify as many of such sources as is possible, understand what they have available and their indicative terms. No matter what source you identify as best suiting your requirements, integrity and professionalism should be your guiding and operating principle. Even when you borrow from friends and family, do not take that for granted. Give them all the head up information they need to have. Good or bad. Nothing is as important as the relationships you keep.