How to get a small business loan from your bank? You’re about to learn some interesting tips that will improve your chances.
Across Africa, smart entrepreneurs with brilliant business ideas find it hard, and often impossible, to get the small business loans they need to start up their dream businesses.
‘The banks are not lending’ is a very common complaint.
In many countries on the continent, more than 70 percent of bank loan applications from small businesses are not approved.
Have the banks run out of money?
Of course not! In fact, the volume of bank loans to large companies, multinationals and big businesses are increasing every year.
So, what are the secrets of getting your small business loan application approved?
How can you become one of the few African entrepreneurs who walk out of the bank with all the money they need to start up and grow their dream business?
This article teaches you everything you need to know about small business loans and how to apply for and get the capital you need from the banks!
Wait a minute. Are you sure you really need a bank loan?
A lot of people make mistakes with bank loans.
Just so we’re clear before we go further into this article, a bank loan is not the only way to raise the capital you need to start and grow your business.
In fact, bank loans are probably one of the more expensive and difficult ways for startups and small businesses to raise capital.
Unlike family, friends and investors who can wait for your business to turn a profit before they get their returns on investment, bank loans and interest must be paid as soon as they fall due, whether your business makes a profit or not.
And if you’re not careful, high bank interest rates can wipe out all the profit your small business makes. So, you need to think again before you answer this important question:
Are you sure you really need a bank loan?
However, if you believe a bank loan is the way to go for your small business, please read on…
What kind of small business loan should you apply for?
There are different types of loans offered by banks and the first step for a serious entrepreneur is to know the right one for her business.
Depending on your needs and the type of business you want to start, there are basically two main types of small business loans: overdrafts and term loans.
Let’s look at what they are and how one is different from the other…
An overdraft is a type of loan that allows you to withdraw money from your bank account even if you have little or no money in it. So, if your bank approves an overdraft of $50,000 for your business, it means you will have access to this money even if your account balance is zero.
Overdrafts are usually short term and last for about six months to one year before they are renewed. As a result, they should only be used as working capital for business activities that are short term in nature such as paying staff salaries or purchasing goods to be supplied to a customer.
One of the benefits of a bank overdraft is its flexibility. You only pay interest on the amount of the overdraft you use; if you don’t use it, no interest is paid (except for some bank charges that may apply).
However, its disadvantage is that it is only available to solve short term capital needs.
Never use a bank overdraft to purchase equipment or lease a property which has a longer term than the overdraft itself. Using a (six-month) bank overdraft to pay for a two-year office lease is trouble. Go for a term loan instead!
Unlike overdrafts, a term loan is a sum of money released to you by the bank and starts to accrue interest from the moment you receive it; whether you use it or not (unless the bank agrees to a delay, usually known as a ‘moratarium’).
This type of loan is best for long-term projects and can last from two to ten years, depending on your needs and terms of the loan. Just know that the longer the loan lasts, the more interest you will have to pay over time.
Term loans are best for projects or buying items that have a long life span. This makes it ideal for purchasing equipment, leasing a warehouse, building a factory or buying a delivery truck for your business. No matter what you decide to use it for, just make sure it’s spent on an item that helps your business to make money.
Term loans are paid back to the bank in fixed monthly installments over the term (duration) of the loan. So, if you’re given a 3-year term loan, you will have to pay a fixed amount every month for 36 months until the full amount (including interest, fees and charges) have been repaid.
The reason why banks don’t like to give loans to small businesses…
Now that you’re convinced you need a bank loan and also know the type of loan you want, it’s time to reveal the reason why banks don’t like to give loans to small businesses and startup entrepreneurs.
They call it ‘high risk.’
This simply means there is a high likelihood that something may go wrong with a small business and make it unable to pay back the bank loan (plus interest).
If your bank believes that giving you a loan is a ‘high risk,’ your loan application will surely be denied! Unless you can do, show or prove something that reduces the risk to a low level, very few banks will want to give a loan to a high risk business.
Think about it for a moment. Banks make over 80 percent of their profits from interest charged on loans given to customers. The more interest that is actually paid back, the more money the banks make. This is why they prefer to give loans to ‘low risk’ customers.
This is the reason why banks keep running after large companies, multinationals and successful businessmen to give them loans. Just recently, Africa’s richest man – Aliko Dangote, secured a $4.25 billion bank loan to build an oil refinery in Nigeria.
Getting any size of loan you want is very easy when you’re already successful – whether you’re a big company or an individual entrepreneur.
Banks will run themselves over to give loans to credible and successful companies because they are considered ‘low risk.’ These companies have a proven business that makes money. They also have a reputation at stake which makes them more likely to pay back their loans.
But you’re different, you’re a startup, a small business – you still have to prove that your business WILL make enough money to pay back a bank loan.
Until you can prove that you’re no longer a ‘high risk investment’, banks may likely consider your small business loan application as a gamble.
Let’s look at five effective ways to reduce the risk in your loan application and ensure that it gets the approval that you need to secure that small business loan.