Applying for a small business bank loan

Applying for a small business bank loan
If you want to start up a small business, it’s best to go to your local bank, though there are several lenders out there who will want to oblige you. You may decide on any one lender, preferably a bank, but the premise on which you are given the loan, depends on your presenting a loan proposal, which contains an outline of your need for the money and what it will be used for.

Business loans are of various types and widely available. These are some aspects of a loan:

Small business loans: These loans are given to start-ups. Here, you borrow money for your business and repay it within an already mutually agreed term, at a fixed rate of interest.

Interest rates: You can avail of a small business loan either at a fixed interest rate or a variable one. A fixed interest rate loan pre-sets the amount you repay every month until you repay everything. However, a variable rate loan generally fluctuates, and depends on your bank’s base rates. So, you may end up paying much more than you’re ready to.

A capped interest rate gives you the option of gaining from any fluctuation in interest rates. However, the rate will not go higher than an agreed level during the term of repayment.

Before you apply for a loan: Consider these aspects before applying for a loan:

• Know exactly why you need the money: You must be able to demonstrate exactly why you need the amount of money you asked for in your proposal. State just how the loan will serve that need, so make it so watertight that there are no loopholes at all. Talk of expected income and returns.
• Be realistic in your plans: If you ask for money to tide over a difficulty, your bank may not feel you are the right applicant for a loan from them. So, be realistic about your need for money. Show how you intend making a return on investment.
• Read the fine print: When considering the terms of a loan, read the fine print regarding repayment very closely. Look out for hidden charges, penalties or fees for taking a loan or late payment penalties.

What to include in your proposal for a small business loan:

• A description of your small business: Describe your business, what product or service you intend to offer, your scale of operations over the next 5-10 years, your customer base and your existing rivals.
• Experience of members of your company management: Attach resumes of all co-owners of your business and their management experience.
• Co-owners’ financial statements: All co-owners should send in their financial statements relating to the past 90 days, along with their latest income tax returns.
• Plan of loan repayment: Make a plan of the way you intend to repay your loan from your projected income. State the source of your income and the timelines for income in the month and show budgets and cash flow plans in support of your plan.
• Balance sheet: This should reflect all the present-day equity contained in the business and if you already have a debt to repay against your business, this should also be mentioned.
• Projected cash flow for the first year of business: Make a table of your expected income and expenses, showing profit and loss with explanations and assumptions as to how you arrived at those figures.
• Loan collateral: Documents pertaining to the assets and property you are putting up as collateral for the loan applied for should also be included.
• Other important documents: These would include a lease deed, sale deed, partnership agreement, licenses and letters of intent and contracts.

The above information is necessary for lenders to ensure that your product or service will be in enough demand for you to repay your loan and that your management team is experienced enough to run the business successfully and repay the small business loan applied for.

By Mithi Chinoy

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