Preparing towards a Small Business Loan

Background Information:

Getting that initial financing you need to get your business off the ground may seem like a daunting task. However, it is the vital part which many CEOs and managers seem to neglect when planning their business.

Having that initial support for your business can often times be critical to its success. According to a New York Fed (www.newyorkfed.org) survey, 40% of small businesses apply for loans, while 51 % apply for amounts of less than $100,000. The situation is similar in the U.K., with 46 % of small businesses applying for small or medium sized loans, according to gov.uk. Such loans usually support working capital requirements and general overheads, including payroll and product or service development.

Out of the 5.8 million companies currently operating in the United States, 99.7% are small businesses, while companies who employ fewer than 20 people account for 89.8% of the total (U.S. Census Bureau). This translates into c. three million credits for such businesses per year. In the U.K, there are 4.9 million registered businesses, with 99.2 % of them being small businesses, i.e. with fewer than 50 employees, according to gov.uk.

In terms of the financing sought, the situation is both the U.S and U.K. is similar, with lines of credits and business loans being the most sought after types of loans. According to HSBC, 65 % of all financing sought by small businesses in the U.K. consists of lines of credit. Here’s a breakdown:
$0-$100,000
51%
$100,001-$500,000
30%
$501,00 - $1,000,000
9%
$1,000.000 +
9%

Before you borrow money:

Financing is almost always a necessity, and mistakes are common. There are a few base figures to calculate, before applying for a loan:

Stage 1: Status quo analysis

First, you must perform an analysis of your company’s ‘status quo’. This shows you how much money you actually need.

 

 

Conducting such an analysis implies the use of the most important indicators a business can calculate, i.e. Cash Flow, NPV and IRR. Let’s briefly explore them. Also, remember to develop a compelling elevator pitch. More on how to build elevator pitches here.

 

Cash flow is essential because there are many institutions who offer credits only if the business owner pledges collateral, should the business default. The problem is that when a small business applies for a loan, itdoesn’t usually possess considerable assets or its assets are already leveraged. Cash Flow is an essential partof the process. When a business is actually making more money than it spends, it can ultimately pay all its debts. We highly recommend performing this analysis prior to applying for any type of financing.

Stage 2: NPV Calculation

The second round of indicators, depending on the type of financing you’re after, are the Net Present Value (NPV) of an Investment and its Internal Rate of Return (IRR).

 

 

These apply particularly if you’re looking to raise capital from investors, but recently, banks have started paying attention to them as well. Online lenders have proprietary formulas on whether to approve or reject businesses, but they also take similar calculations into account.

 

They are also linked to Cash Flow, particularly discounted cash flows or DCF, but in a slightly different manner. More info on how to calculate them is available here. They also added an Excel template, to illustrate how you should calculate your NPV and IRR.

 

The general rule is that in order for a small business to qualify, its NPV has to be higher than zero, meaning discounted cash flows must have a positive value for an analyzed time span (3 or 5 years, depending on the interval you’re using). The IRR has to be higher than the actualization rate which you use in your calculus. The actualization rate is usually between 20 % and 35 %, and it is the minimal rate which an investor would expect when investing in your company, or a lender would expect to get in repayments.

Additional Tips

After your numbers are sorted out and you understand what is the amount of financing you should apply for, the next stage is to look for the Where to find your small business finance. This is where us, BusinessLoanCompanies.com, come into play.

 

We are reviewing online lenders. These companies are far more accessible and are small-business oriented. Unlike banks, there’s no need need for a full proof business plan, securities, or going through bureaucracy. Sign up takes minutes, and approval is usually within hours.

While this implies some additional costs, speed is often times crucial and may prove a definitive advantage of online loans.