Getting a startup loan: When is the right time?
As 2016 draws to an end, you are probably making big plans to usher in the New Year. After all, it’s been a tough year with the economy, and many entrepreneurs have tried to see the glass as half full despite the challenges. One of your big plans may be that you want to get capital to jumpstart your small business with a business loan. It’s logical, but traditionally, business experts and established entrepreneurs would advise that you do not apply for a business loan in your early days; rather, look inwards for your first capital – family and friends. You may even have savings from the time you were working a 9 to 5 job. Business loans put a lot of pressure on small businesses, even established ones who have the capital to service them, and you do not want to be in debt at the stage when you should be building slowly.
We read success stories of entrepreneurs who made it in business, and some people may come away thinking that it happened in a short time because they found capital. That is not true; building a business is a slow and tasking process that requires patience, faith, and perseverance – and a lot of times, minimal capital.
However, if you still think that you need that loan at the early stage of your business, then you must think carefully about it, and evaluate the purpose of the loan. If you intend to seek these loans from various financial institutions, then you must be prepared. Here are some questions that you should think through before submitting that application.
How much money do you need?
Before the New Year, determine how much money you would need to start. Begin by creating a budget that is supported by your financial projections that would kick your business into gear – getting customers and making sales. This information should be contained in your business plan already. Be cautious in your assumptions; do not assume that your products or services will receive a grand reception once it is launched with customers banging at your door to get their hands on them. This can affect your forecast. Remember that the loan has an estimated tenure, and must be repaid with interest. In addition, do not underestimate what your fixed or variable costs will be or else you could run out of cash before your projected time, which could undermine your business. On the other hand, do not overestimate your costs and ask for more than you need. It puts more pressure on your business. It is best that when seeking a loan, you ask for what you need, and nothing more. That brings me to the next question about determining what you need the money for.
What do you need the money for?
Before you get that loan, what do you need that money for? Your start up needs may require operational supplies such as an office space and supplies that will help you operate effectively. However, since a loan repayment requires immediate payment once you get it, it is best to invest in assets such as equipment, software, a factory, etc. that will generate cash flow for you as soon as possible. Therefore, evaluate what you need the money for, and what you intend to acquire will help your cash flow.
How long has your business existed?
The length of time that you have been in business to qualify for a loan is another issue that you should consider. It is standard that financial institutions give loans to small businesses that have existed for at least three years – and for good reasons too. In three years, a business would have a more substantial record to show if it is healthy. It’s financial records will show whether the operation is generating revenue, sensible cash flow, or profit even if it hasn’t broken even. This will show how strong the business is, since its survived in its third year. And this can make them more confident that you can pay back the loan.
How long will it take you to pay it back?
To be able to pay back the loan within the tenure, it can be assumed that demand would be high for your products or services and you would generate high-profit margins. This would convince your lender about your business’ growth potential in the long term. This is another point to consider: if you were to get the loan, would you be able to do enough business, get high profits margins, and be able to pay back, and how long would it take you to pay back?
How much collateral do you have?
Collateral, that asset that secures a loan, so if you are unable to repay the loan, the lender – the financial institution, will seize the asset. The financial institution’s priority will be to reduce its risk. In addition, the collateral must match in value to the size of the loan that is applied for. This is important to consider if you wish to secure a loan. But do you have assets to offer in exchange for collateral such as real estate, value equipment, among others?
Getting a small business loan is a practical thing to do, but it could also be unfavourable, especially if you seek for one when you are not established in your business. In the early days, your plans may change due to market demand or government policies, or the economy, or a heavyweight competitor threatening your position in the marketplace. The early stages of business are usually filled with hits and misses. With a loan weighing on your shoulders, you would not want to take risks or be innovative in your business to grow. Raising capital is a tough task to do; but there are other ways such as government entrepreneurship programmes, entrepreneurship competitions, grants, and most importantly family and friends. If you can scale back on your plans in the beginning – work from an incubator and share resources – so that you can plow back capital in your business, you can make revenue for a long as it takes to finally apply for the loan. Now, that’s one good plan to usher in 2017.
Till then, happy holidays and a happy New Year to everyone!