If you’re in the market for a business loan, chances are that you’re at a very exciting point in your life, where obtaining a quick loan for your new business venture is the first step towards entrepreneurial success!

The other scenario might include expanding on an existing business, which is equally exciting. Both, however, require some understanding of what’s involved.

The primary task is to prepare a detailed and appealing business plan. For loan approval, this is an essential part of the process and it’s your duty to fully educate the lender on what your proposed new venture entails. Lenders use this business plan as a guide in determining the best finance option for you.

Understand the necessity for your Business loan

The day that you decide to apply for a loan is the day that you take your first step. It’s the biggest one, but there many that follow and they all play a pivotal role in the application process.

It’s important to ask yourself how much you need to borrow from the lender and how long you will need it for. Determining the type of loan as important. Those are the easy questions. The challenging ones are to ask yourself whether or not you can afford to repay the loan when you consider the instalment and the interest attached to it. Also considering what you are able to offer the lender in terms of security.

If any of the questions raise any doubt in your mind, simply refer to an online repayment calculator to quickly discover your affordability. 

Access to your Business loan

There are two loan types that each offer a different range of access to the funds you require. Firstly, you get ‘at call’ or short term loans which are available on a semi-regular basis to assist with cash flow issues in the business and typically come in the form of an overdraft. Next, you have upfront loans which offer you the entire amount upfront in order to purchase an existing business or otherwise expand on your current one.

‘At call’ loans have no fixed terms, while ‘upfront’ loans require a portion of the loan plus interest to be repaid on a regular basis. The instalment will depend on the amount and the term of the loan. Remember that the longer you extend your loan for, the more interest you’ll end up paying. 

Something to consider when applying for Business financing

When considering an overdraft, be aware that the higher the overdraft amount - the higher the fees. You could find certain lenders including a clause on the agreement which states that they are able to demand the repayment at their discretion.

Interest rates are applicable in two ways, either fixed or variable. What you choose will determine whether your budget remains intact or has variance, as well as impact the overall cost of the loan. Your choice, however, will largely be based on the cash flow situation that your business is in after all expenses are paid.

A good idea is to consider a fixed rate if your business doesn’t turn a high profit since a variable rate could cause your repayment to rise beyond affordability.

Do your homework, then plan!

We have covered a lot, but there is always more to learn from those you trust and have experience in taking out business or even personal loans. If you have an accountant or business adviser, use them to gather information before deciding to approach a lender.

First, plan the business then plan the finance. Loan providers will ask all the questions that they need in order to determine the history of the business and how it has fared financially.

In the business plan that we spoke about earlier, make sure you include the profit and loss budget as well as a cash flow forecast. Your business plan needs to include all past and future projections, which should include staffing and the market you are selling to. All these factors will greatly count in your favour when the consultant is perusing through it to determine approval. 

Are there risk assessments?

The answer is yes. Banks and other online loan institutions assess your business’s risk profile during the approval phase. What lenders look for when determining what is risky and what’s not, will help with your proposal.

Generally, what they scrutinize is the nature of your security; your affordability in terms of repaying the loan regularly which poses a cash flow risk; and your ability to repay the debt as a whole, which is a business risk.

What is determined as a risk?

There are a number of things and each lender might see one thing as serious and another might not. However, if any apply to you, you should consider the possibility that you might not qualify for a business loan.

Start-up businesses are high risk since so many of them fail in the first 2 years. If there is no security on the loan, this is seen as a risk and a general lack of business history would also be a red flag to the lender. Seasonal businesses will need to provide solutions for the quiet seasons to not be seen as risky and any other businesses with a poor credit history who may have to apply for a bad credit loan.