Guest post written by Marry Martin. To gain exposure by writing for us, read our write for us guideline.
The modern business markets give space to only those entrepreneurs who adapt their operations according to the changing patterns of business world. However, adapting business operations require a lot of money. Be it the launch of new product or the opening of some side business, we always need finance to carry out one business operation or another. Starting new business ventures and exploiting growth opportunities is easier by securing finance and repaying it with the profits you make on your investment.
I have met many entrepreneurs who start their ventures with borrowed money, survive for a few years before seeking business finance again but are refused by the banks. There is a saying by Michael Vodicka which is as follows.
‘Securing a business loan can be a very powerful catalyst for growth. So be sure to do your homework and know the rules of the game in order to increase your chances of success.’
Many entrepreneurs don’t get business finances because they have previously been bad with their finances but there are also those who don’t comply with the rules and regulations set by the lenders and so their loan applications are rejected.
I am highlighting 5 factors that can increase their chances of getting business finance.
1. High Credit Score!
Banks maintain a credit profile for individuals who have taken loans in the past. Loans are given as per strict conditions and criteria. Abide by these conditions and return the loan on time to earn high credit score. Credit score ranges between 300 to 900 points and depend upon a number of factors such as your credit history, repayment capacity, credit worthiness and certain other factors. The higher is your credit score, the better are your chances of successfully getting financial assistance.
- If you never miss a payment of loan installment and pay it on time, your credit score increases.
- If you pay one or two extra installments and always pay maximum amount of loan per month, your credit score increases.
- If you carry a balance of not more than 25% of credit limit, your credit score increases.
- If you are not making much credit inquires from several financial institutions, your credit score increases.
2. Low Outstanding A/R!
If your accounts receivables pay you within 3 months and you are liable to pay to your creditors within a month, lenders would dislike it. The shorter is your cash conversion cycle, the easier it is for the bank to lend to you. Outstanding accounts receivable for long duration is a signal of slow paying clients and high chances of bad debts. If entrepreneurs have accounts receivables, they must keep a provision for bad debts for loan approval.
3. Low Debt/Income Ratio!
The lower is your debts to income ratio, the better it is for you. Lenders never want to see major portion of your income being spent on servicing loans, since it reflects higher chances of third parties claiming over your business. The requirement of debt/income ratio varies from lender to lender. Mostly, if your debts make more than 40% of your income, banks are not willing to risk their money with you.
4. Fair Financial Statements!
The true and fair financial statements of the last few years encourage lenders to finance your business. If all disclosures are fair (i.e. assets reflect fair market value, provisions have been kept for necessary contingencies, taxes have been paid, company has announced good dividends to shareholders and debt to equity ratio is good), lenders are normally willing to lend. Intentional misrepresentations lead to rejection of loan applications.
5. Sound Business Plan!
Lenders have nothing to do with your business except they want to know if your business has the potential to repay their loan with interest or not. For that very purpose, they always look at business plans mapping out the plans for the next 3-4 years. Besides looking at the profit potential, lenders also look at the worst-case contingency plans of action. These plans reveal upon them the tactics which business would use during bad times to get out of the bad situations.
If all is well with your business with respect to the above factors, then you can probably secure business finance from some reputable lender without much trouble.
Marry Martin is a specialized writer, she has been writing for more than 5 years on the topics related to Wholesale Suppliers, wholesale trade and wholesale products.