Sometimes you may need to borrow money from a bank to fund your business. When you are applying for a loan, you have understood the terms of the loan of the bank. Borrowing money from a bank can be helpful for companies, but you shouldn’t take it for personal needs.
First try to get money from other sources, or create a long term plan to start your business. Then try applying for a bank loan.
1) Try to finance as much as possible with own resources
The first person who has to be convinced of the profitability of your idea is you, and if you don’t invest the money available to finance your project, it is logical for the bank to wonder why it would have to have more trust in the company than the entrepreneur himself.
To avoid the conditions associated with credits, a good option is to resort to the so-called “Love Money,” which is sometimes also known as 3F (Family, Friends, and Fools: family, Friends and Fools). The more money you have raised for your project, the more you will prove to the bank that you are not the only one who is risking it.
2) Be and be professional at all times
The second capital aspect is to be professional. The image is critical. An interview with the bank is prepared, presenting itself informally would take unnecessary risk. It is necessary to review key aspects of the project and to be clear who will be the customers, the reason that will decide to choose our product or service, what will be the competition, estimated sales, and all financial aspects in detail (Investment, profitability, treasury).
All banks ask for a business plan (also called a plan of activities). This document is important: it must be professional and very well synthesize the implications of the investment. It has to have an excellent presentation, captivate the attention of the reader and not be a small set of raw data. Likewise, it is fundamental that the entrepreneur has it well understood and knows how to explain to the banker.
The image, as we have said, is fundamental, and typically showing a professional image is only achieved by being professional and working the details.
3) Do not try to finance long-term needs with short-term credit policies
The entrepreneurs have to be very transparent about their financing needs, and not fall into the error of funding the long-term with short-term tools. Unfortunately for Europe, this has happened a lot during the years before the crisis, and this imbalance made the companies in a situation of extreme fragility. As soon as the bank did not renew the policies in the short term, they were already drowned and could not cope with their commitments.
If you have a project of a planned duration of X years, you have to adjust the financing to this duration, with a repayment of the debt in different installments, depending on the benefits expected to generate the investment.
4) Carefully review the clauses
The bank always wants to protect itself, and basically has two ways to do it: either charging too expensive for the risk you are taking is worth it, or putting clauses that will allow you to limit the risk.
To assess how expensive a loan is, it is not enough to value the interest rate (even if it is the primary criterion). You need to consider looking at other aspects, such as commissions or other services that the bank may want us to hire.
The clauses that allow the bank to reduce its risk also have to be analyzed with a magnifying glass, and especially the consequences that would derive from execution by the bank of the guarantees offered.
5) Apply for credit to several banks
The bank should be considered as a supplier as anyone, but as it has the power to decide whether or not to accept your product, and under what conditions, sometimes you believe too much that “ask for credit” and you end up thinking by mistake that you do a favor.
The reality is that there is competition between banks and not working exclusively with one. The bank has to know that you have other sources of financing and that if you do not like their conditions, you can go to see another.
Any loan you ask, however small, you have to call at least half a dozen banks. It is even possible to put into competition agencies of the same financial institution since they often have different policies and objectives.
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