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Useful Tips on Borrowing Money
Here are some useful tips on borrowing money. Borrowing money
is one of the most common sources of funding for a small
business, but obtaining a loan isn't always easy. Before you
approach your banker for a loan, it is a good idea to understand
as much as you can about the factors the bank will evaluate when
they consider making you a loan. Let's start by exploring some of
the key points your banker will review:
Ability to Repay/Capacity:
The ability to repay must be justified in your loan package.
Banks want to see two sources of repayment - cash flow from the
business, plus a secondary source such as collateral. In order to
analyse the cash flow of the business, the lender will review the
business's past financial statements. Generally, banks feel most
comfortable dealing with a business that has been in existence
for a number of years because they have a financial track record.
If the business has consistently made a profit and that profit
can cover the payment of additional debt, then it is likely that
the loan will be approved. If however, the business has been
operating marginally and now has a new opportunity to grow or if
that business is a start-up, then it is necessary to prepare a
thorough loan package with detailed explanation addressing how
the business will be able to repay the loan.
Credit History:
The first thing a bank will determine when a person/business
requests a loan is whether their personal and business credit is
good. Therefore before you go to the bank, or even start the
process of preparing a loan request, you want to make sure your
credit is good.
Equity:
Financial institutions want to see a certain amount of equity
in a business. Equity can be built up in a business through
retained earnings or the injection of cash from either the owner
or investors. Most banks want to see that the total liabilities
or debt of a business is not more than four times the amount of
equity. A business owner usually must put some of her/his own
money into the business. The amount an individual must put into
the business in order to obtain a loan is dependent on the type
of loan, purpose and terms.
Collateral:
Financial institutions are looking for a second source of
repayment, which often is collateral. Collateral are those
personal and business assets that can be sold to pay back the
loan. Every loan program requires at least some collateral to
secure a loan. If a potential borrower has no collateral to
secure a loan, she/he will require someone to guarantee the loan.
Otherwise it may be difficult to obtain a loan.
When you want to borrow money you must be prepared to answer
these questions:
Can the business repay the loan?
Can you repay the loan if the business fails?
Does the business collect its bills?
Does the business control its inventory?
Does the business pay its bills?
Does the business control expenses?
Does the business have a profitable operating history?
Are sales growing?
You may freely reprint this article provided the author's
biography remains intact:
John Mussi is the founder of Direct Online Loans who help UK
homeowners find the best available loans via the http://www.directonlineloans.co.uk
website.
MORE RESOURCES:
Credit - Google News
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