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Applying for Small Business Loans Successfully

Most start ups soon feel the need for extra money to expand, advertise, and generally reach a size where the return on investment is good. Once the initial investment corpus earmarked by the entrepreneur is used up, they turn their thoughts to small business loans. However, successfully applying for a small business loan is no easy task. Bankers and lenders look for certain qualities in the entrepreneur and their business before they decide to grant the loan. If the borrower is aware of what the lender expects, then the borrower can prepare their application accordingly.

When asking for small business financing, it is up to the borrower to sell their idea to the banker. As bankers consider small business loans risky, they are not usually willing to grant such loans. However, if the entrepreneur persists with a well prepared business plan that clearly outlines the strategies for taking the business forward and shows how the repayment will be made, bankers are much more willing to give a fair hearing.

When applying for small business credit, you need to ensure that you are putting in at least 25 to 50 per cent of the money needed. This will convince the creditor that you are serious about your business. The papers you prepare for your potential creditors should clearly show that you have invested your personal funds in the business.

Small merchants and those running restaurants can also apply for a merchant cash advance. One advantage of this kind of financing is that you can use the funds at your discretion. You need not tell the bank how you are going to spend the money or on what heads. You can use the funds to pay staff or redo the premises. Of course, you need to establish a clear method of repayment and a strict schedule to repay the loan. Small business loans of this kind are relatively easier to obtain.

One way of obtaining a lower rate of interest from small business lending institutions is to approach the Small Business Administration for help. If this institution underwrites your loan, the risk to your lender is reduced. You will then be in a position to ask for a lower rate of interest on your loan. By reducing your interest outgo, you will be able to garner better profits from your business.

Yet another way of ensuring that you get the loan is to offer collateral. In the event that you need a business credit line to expand your business or spend on advertising and marketing, you should offer the lender some collateral. If your business owns property or machinery, use it as collateral, that is, pledge it to raise the cash you need. Again, this reduces the risk to the lender, helping you to ask for a lower rate of interest as well.

When bankers look at an application for small business loans, they will primarily be looking at the business viability, the business assets, and the personal credit rating of the entrepreneur. If you want to obtain the loan, your presentation to the banker should cover these points. You need to show that the business plan is sound and will generate sufficient revenues to repay the loan on time. You also need to show that your credit rating is good, as the banker is ultimately lending the money on your word.

Business Finance – Seek and Ye Shall Find

I never miss the opportunity to have a major rant against our friendly neighbourhood banks and their questionable business practices – and events in recent years have only served to consolidate my opinion.

Take, for example, the scandal of Royal Bank of Scotland; in February 2009, they posted the largest annual loss in UK business history – £24billion. Now this may sound unreasonable, but with a Chief Executive (Sir Freddie Goodwin) who was earning a reported £4million per year, I would have expected a slightly better performance, even in these difficult times!

And now that RBS has now been taken into public ownership, guess who will ultimately be responsible for these losses – you and me! But it gets worse…what was Sir Freddie’s punishment for such glorious failure – early retirement and a pension of nearly £700,000 per year, payable from the age of 50!

Let’s get this into perspective; with an average annual salary in the UK running at about £24,000 per year, it would take the average worker 29 years to earn the money that Sir Freddie will get in a single year – and he doesn’t even have to get out of bed! Is it me, or does this stink of gross immorality? No wonder (at the time of writing) the Government is desperately looking for ways to cancel this pension arrangement.

And it gets worse – in the UK, the Enterprise Finance Guarantee Scheme is a new government scheme to guarantee up to 75% of any loan that a bank makes to a business. It is supposed to be available to businesses that do not have enough assets to offer banks as security for loans, but recent reports from the Federation of Small Businesses (FSB) and the Forum of Private Business ((FPB) indicate that businesses are experiencing major difficulties accessing the scheme, with the banks being less-than-helpful.

This isn’t too surprising; the previous scheme that the EFG has replaced, the Small Firms Loan Guarantee Scheme, faced the same difficulties for many years. The banks conveniently failed to market it properly and many small business-owners who would have benefited from it were not even aware it was in place. Those who did were often made to jump through endless hoops in order to access it. But let’s be clear, the Government has backed the EFG to the tune of £1.3bn and so if you are a small business owner looking for finance, don’t be afraid to interrogate your Bank Manager about the scheme.

EFG is actually part of a package of Government measures called ‘Real Help With Finance,’ designed to assist businesses in accessing financial assistance. Other measures included in the package are:

  • A £10bn Working Capital Scheme, securing up to £20bn of short term bank lending to companies with a turnover of up to £500m.
  • A £75m Capital for Enterprise Fund (£50m from Government augmented by £25m from the banks) to invest in small businesses which need equity.

Of course, these all sound great, but, as the experience with EFG shows, the reality for most small and (especially) micro-businesses trying to access these funds may be frustratingly different. Still, knowledge is power and its worth knowing about all the potential options available if you are seeking business finance.

Raising business finance is not easy at the best of times and in the current economic climate, it is becoming increasingly difficult. But, as with all things in life ‘difficult’ doesn’t mean ‘impossible’ and if you have a strong, viable business or business idea, you should succeed even though you now have to work a little harder.

What The Future Looks Like For Small Business Financing In Greece and the US

Recently the markets have been very volatile due to scares about the Euro in Greece as well as American credit worthiness. During the last financial crisis, Greek banks had to help the government rather than the government helping the banks, as was the case in the U.S. But now, as restructuring seems imminent, banks are worried their balance sheets may burn.

Withdrawals are rising and deposits are down; Greeks would rather stuff their Euros underneath their mattresses. The bankers have to reassure them all is well. They are loathe to the idea of default. But the top bankers recognize that the threat of default is enough to allow further restructuring. It’s not necessarily the bankers who could stand to profit by another bailout, as much as it is the average Greek. At present, more thought is being paid to not losing money instead making profits. It’s a long road ahead. At home, when it comes to small business financing, capital is continuing to bunch together. Take New York City for example. The business firms that have merged over the past five years are more productive than they were before. This means that New York has become more competitive as a global city over the past few years. No competing firms would want to leave, thereby opening up their place for other firms from abroad. So agglomeration is a good thing for small businesses and large. Unless transportation costs drop so much that it doesn’t matter whether a firm is in a centralized area; they can find cheaper labor elsewhere and continue to export their product the way they have.

But with most human-capital intensive industries centered in large cities, such as finance, management, and systems design, it stands that they will not be going anywhere soon; transportation and global society is a long way away from being at the point where it doesn’t matter where a production center and a client are in relation to each other. In order to keep these agglomerations where they are, however, it’s important that specific restructuring be implemented: investing in research and education, infrastructure, growth, as well as the loosening of immigration laws.

These issues are governmental and will be mostly resolved over the next election or two. In the meanwhile, it’s important that small business financing continue, both abroad and at home. The more confidence people have in their business, the more they have in their national market, and the stronger a national market, the stronger the global market.