Having made the decision to finance your business using borrowed money, the next step for you will probably be that of making a business loan application. Before getting to this point of applying for a business loan, you will (hopefully) have explored all the other business finance options, and arrived at the conclusion that the best option for you is that of using a business loan. At this point, then, you will probably be interested in understanding how to go about applying for the business loan. That is question we will be tackling in this article: as we explore the key steps in the business loan application process.
Determine the amount to be borrowed
Making the decision to finance your business using borrowed money is one thing. Figuring out the exact amount you need to borrow is another task altogether. You have to take several factors into consideration, when working out the exact amount to borrow. The most important thing here is, of course, a needs-assessment exercise: where you try to figure out how much money the business needs. The end goal is to ensure that the amount of money you borrow is one that is just enough for the need.
If you borrow too little, you will run short of funds before completing the business project you have in mind. Then you will probably have to embark, once again, on the rather taxing task of looking for additional business finance. In so doing, you will be spending time and energy that could have been better expended on other business tasks.
On the other hand, if you borrow too much, you may have problems repaying the debt when it becomes due. And you have to appreciate the fact that having borrowed the money from a bank, you will probably have to repay it with quite a bit of interest. So if you borrow much more money than the business actually requires, you will have to repay the extra funds with interest: notwithstanding the fact that such funds will not have been usefully deployed in the business. To use an analogy, just as you wouldn’t want to hire more employees (labor) than you have real use for, you should similarly avoid borrowing more money than you have real use for in the business.
Prepare a business plan
Most lenders will demand to see your business plan, before they can give you a business loan. You therefore need to prepare a persuasive business plan, before venturing to make an application for a business loan. It is through the business plan that the lenders will be able to figure out whether the business venture you have in mind is one that is capable of repaying the money you will be borrowing.
Identify an ideal lender to borrow from
Having worked out the amount of money you should borrow, and having prepared a persuasive business plan, the next task for you will be that of identifying an ideal lender to borrow from. Here, the most important thing is for you to look at the lenders who are known to give loans to businesses like yours –that is, the lenders who have a track record in that area, and then compare them. You have to look at things such as the interest rates charged by the respective lenders, as well as the respective lenders’ loan terms and conditions (paying attention to things like repayment periods, grace periods, penalties… and so on).
You may actually need to knock on the respective lenders’ doors, and get the loan terms from them directly. That is also how you will get to know whether the respective lenders are actually willing to give you the business loan you are looking for. That is important. Don’t take it for granted that all lenders will be willing to work with you. Don’t also assume that because a certain lender has a track record of lending money to businesses such as the one you have in mind, they will automatically lend to you. It may turn out that they have over time changed their business models, or that they are simply skeptical about lending to you.
Thus, when we talk about identification of an ideal lender to borrow from, we are making reference to a practical exercise: where you actually need to knock on the respective lenders’ doors, see whether they are willing to lend to you, and then compare their loan terms and conditions. At the end of this exercise, you should have settled on one lender: the lender you will be taking the business loan from.
Fill in the business loan application forms
Having settled on a particular lender to take a business loan from, the next course of action will probably be that of requesting for business loan application forms from that particular lender. Then you will need to fill them in accurately and honestly, and in accordance with the instructions on the forms. You will need to provide all the required information, and answer all the questions — even those that seem to be a bit intrusive. You will need to appreciate that the stakes in these sorts of things are usually very high, and the lender needs certain bits of information to be reassured about your ability and willingness to repay the business loan you will be taking.
Make a presentation to justify your business loan application
There are some lenders who will give you a business loan on the strength of the information you provided in your application form and on your business plan. Many, however, require that you make a presentation before them, before they can make a decision on whether or not to lend you. If you are dealing with a lender who requires a presentation, then you will just have to take it in your stride. The most important thing for you, when making this sort of a presentation, is to ensure that you are well prepared with all the relevant info, and that you are well relaxed.
Follow up on your business loan application
After completing your business loan application, you may have to do some sort of follow up, to see what the outcome is. There are some lenders who process the business loan applications very fast. There are others who take quite a bit of time. Therefore, you may be looking at a situation where just have to wait for a couple of hours or so, to get a decision on whether you will be getting the business loan or not. On the other extreme, you could be looking at a situation where you have to wait for several weeks, before getting a decision on whether you will be receiving the business loan or not. The most important thing is for you to know how to follow up on your loan application in a tactful manner, should the need for such follow up arise. And when the business loan money lands in your account, you need to ensure that it is well deployed, in accordance with your business plan, so as to ensure that it serves the purpose for which you borrowed it.