Fortunately, it’s not an entirely sad situation; risks can be reduced.
Entrepreneurs who can successfully apply any of the five ‘open secrets’ I’m about to reveal will significantly increase the chances of getting the loans they want from their banks.
In the bank’s eyes, these methods increase the likelihood that your business can and will pay back the loan (of course, with the interest).
#1 – Get a supply contract (or purchase order) from a credit-worthy customer
One of the big risks that worry your bank about your loan application is the ability of your small business to sell enough products or services that will make money to repay a loan.
A supply contract from a creditworthy customer (usually a company or organization with good business performance) proves to the bank that somebody is interested in your products and is willing to pay (and can pay). (photo credit: utilityassist.co.uk)
One of our best examples in this regard is South African entrepreneur, Anna Phosa.
From a small pig farm which she started in 2004 with $100 and only four pigs, she received a $2.5 million dollar loan from South Africa’s ABSA Bank to enlarge her piggery business.
This loan became possible because Anna secured a contract to supply 100 pigs a week to Pick ‘n Pay, one of South Africa’s largest supermarket chains.
With a contract in hand and a credible large company behind her, Anna had significantly reduced the high risk that would have made her loan application difficult to approve.
From just four pigs, her new farm, which sits on a 350-hectare space, now holds nearly 4,000 pigs at a time. She currently employs about 20 staff and has become something of a celebrity pig farmer on the continent!
#2 – Pledge your property as collateral (or security)
If a bank loan is your preferred source of capital, you may have to pledge something of value to the bank which it can sell to recover the loan and interest in the event that you cannot repay.
Collateral is usually any item of value such as real estate (buildings and land), cars, expensive jewelry and shares that are quoted on the stock market.
The collateral you pledge remains yours until you are unable to repay the loan. At that point, the banks will move to sell the property to realize the loan amount and interest you owe them. Banks often insist that the value of the collateral you pledge is the same value (or more) of the loan amount you are applying for.
To confirm that you have the right to pledge an item or property as collateral, banks will often want to see an evidence of ownership. If the item is not yours, the banks would want to see a Letter of Consent from the owner that gives you the permission to use the asset as collateral for the loan.
Warning: Using your property as collateral for a loan is a very serious decision that could have life changing consequences for you (and your family). You should make sure that the business you need this loan for is sound and will make enough money to repay the loan and any interest it accrues.
If you’re not certain about this, you can choose from other less risky ways of raising the capital you need to startup and grow your business.
#3 – Do you have a good credit history?
If you have taken out a loan before and paid it back with all the interest and no delays, it often signals good behaviour and creditworthiness to banks.
Banks and other lending institutions can verify your credit history and gauge the ‘riskiness’ of giving you a loan. If you have been coming up short on a loan you took out previously with another bank, this may show up in your credit history and reduce your chances of getting your loan application approved.
If you have a poor credit history, the banks may insist on collateral or other forms of security for the loan.
Credit reports and background checks are not yet common in Africa. However, as our continent gets more connected and information sharing becomes easier, banks, cooperatives and other lending institutions will be able to share your credit history and information.
In the future, credit reports will play a huge role in determining if your loan application will be approved or rejected.
#4 – A detailed business plan always helps!
To convince the banks that lending you money will not be a gamble, it helps to present a detailed and well thought-out business plan.
What will your business be about?
Is there a market for your products and services?
What is your plan for marketing and selling your products?
What background and experience do you have to make the business work?
What will the loan amount be used for?
The more of these questions you can answer, the more comfortable and convinced the bank becomes.
Your business plan should be a road map that shows the bank that a lot of thinking and planning has gone into your business idea. Most small businesses and startup entrepreneurs do not do a good work of presenting detailed information about their business to the bank.
Writing a business plan can be a simple or complex affair depending on the type of business and who the business plan is meant for (you, banks, investors, business partners etc).
Need help with writing your business plan? You’re in luck! Here’s one mighty resource that will really help you: 100 FREE Sample Business Plan Templates for African Entrepreneurs and Small Businesses.
#5 – Get a guarantor to cover you
A guarantor is a person who guarantees to pay the bank in the event that you are unable to repay the loan and any interest it accrues. A guarantor is often someone who is wealthy or has valuable assets that can be used as collateral (or security) for the loan.
Having a guarantor to back up your loan application reduces the likelihood that you will not be able to pay back the loan. This usually gives banks the assurance they need to classify your loan application as a ‘low risk’.
And depending on the policies of the bank, your loan application would be approved.
Now you know how to get a small business loan from your bank: have you had any problems?
If you’re like many African startup entrepreneurs and small businesses, you may have been unlucky with your small business loan application.
What were the problems you faced?
Have you used any of the methods discussed in this article to help you secure a business loan?
We would love to hear from you.
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To your success!