5 things to consider before applying for business financing
01 March 2019
If you’re a business owner, you’ve probably considered financing at some point for your business. Whether it’s money to help start your business or grow your business, working capital is essential for business owners. While many entrepreneurs are eager to apply for financing, many do not qualify. What is the reason for this?
Many entrepreneurs apply for financing, yet only a small percentage of them are actually ready for financing. How do you know that you are ready to apply for financing for your business? We’ve highlighted five important things to consider before applying for your business loan.
A business plan is essential to a loan application, regardless of if you are just starting or looking for money to expand. A business plan shows lenders that you have truly thought this through and have a clear, actionable strategy for growth. A good business plan should include:
- An executive summary;
- Extensive market research proving the rationale behind your company
- Marketing plan displaying how you plan to gain traction and earn sales
- Operations plan showcasing the management team, your administrative practices and more
- Financial summaries, including projected cash flow for the next two years
A good business plan should be 20-100 pages. The more detailed you are in your plan, the more clearly a lender can evaluate the business and its projected success.
All lenders require some form of security for loans. This means that lenders ask applicants to pledge some form of assets as collateral for the loan, whether it is your property, vehicle or other form of asset.
In the case that you cannot make your loan payments, a lender will have the right to take possession of the asset used as collateral to regain some, or all, of the amount originally loaned.
Almost all business lenders require some form of owner equity for their loans. Let’s say that a lender required 25% owner equity. This would mean, that if you are asking for a $100,000 loan, you would need to show that you are putting in $25,000 or have already put money into your business worth that amount.
By investing your own money into your business you are showing your lender that you are confident in your businesses viability and are willing to take on some of the risk as well.
Your credit score is a record of your past ability to make your payments as required and manage your credit. Each lender has a different score they look for when it comes to loans. We recommend requesting your credit score via Equifax prior to applying for lending in any form.
Business Activities That Cannot Be Financed
There will almost always be restrictions on what expenses can financed. These limitations will vary based on the lender so you should ask up-front what they can and cannot finance.
A little preparation can go a long way when it comes to getting a business loan. Putting together a solid business plan, doing your research, and asking the right questions when talking to lenders is a great start!
Alberta Women Entrepreneurs (AWE) is a not-for-profit organization dedicated to enabling women to build successful businesses. AWE provides unique programs and services to women at all stages of business through advising, financing, mentoring, and skills and network development. AWE offers repayable loans of up to $150,000 to female-owned, Alberta-based businesses.
Blog post submitted by Chamber member Alberta Women Entrepreneurs (AWE).