Today it is relatively easy to get bank loans for your SME as it is the latest trend for banks to pour their cash into the Small and Medium Enterprises. Moreover, thanks to the SME friendly banking rules and regulations put forth by NRB, today entrepreneurs are having a far more relaxed life. Bank loans are not only pretty easy to get these days, they are also available at low-interest rates. You must, however, consider a few things before opting for an SME bank loan.
What Do the Bankers Wish to Know?
Conventionally you had to provide a detailed business plan to the bank for your loan approval but today while evaluating loans generally bankers would be more interested in seeking answers to these relevant questions:
- What is the amount of money required?
- What would this money be used for?
- How do you intend to collateralize the loan?
- When do you intend to pay back?
- How do you intend to pay back?
- You should have definite answers to the above questions if you want your loan to be approved.
The Collateral Issue
Have you got collateral? Understanding collateral is a key factor in getting you the loan for SME. Collateral is nothing more than the assets that you have pledged to cover the loan should you default on the loan’s payments. The assets could actually be your business equipment, business’s accounts receivable or inventory and these are used for securing the loan.
Unsecured loans do not require any collateral. In case you fail to pay off the loan, the lender or the bank could acquire your collateral and sell your assets off. If a small business has no assets of its own to offer as collateral, the lender would be accepting personal assets such as bonds or stocks or any other kind of personal guarantee. What is a personal guarantee? A personal guarantee implies that the borrower would be guaranteeing the loan repayment using personal assets, instead, of business assets.
Factors to Consider before Seeking an SME Loan
Are you getting ready for seeking a loan? Here are a few important things to know before you take the final plunge.
Be Ready with a Personal Guarantee or Collateral
You are sure to get a request for either collateral or a personal guarantee or both in case you are actually a first-time borrower. It is better not to let your spouse sign any guarantee unless he or she is actively involved in the business. A guarantor could simply provide the collateral for that portion of the loan he or she is guaranteeing.
Ask for Enough
Many people are not able to anticipate the situation and end up borrowing less money than they actually require. You could not go back again for more money as banks would become suspicious and may not approve your loan application. You must ask for more money when you are seeking a loan. Borrowing less than the amount you actually require is pretty foolish as that doesn’t solve your financial crisis issue in any way.
Build Your Organization’s Creditworthiness
One step towards building your organization’s creditworthiness is not to use any personal credit card for exclusively business purposes. Most people have their personal credit cards and they often use them for purchasing for their organization. This would not be of any use in terms of boosting your business credit.
Get to Know Your Credit History
You must know your credit history thoroughly so that you could answer any questions regarding your credit score smoothly. You must know your exact credit score.
Ensure that financials actually match up. There is no need to provide financial reports that were prepared and printed last minute before the scheduled meeting. You need time to meticulously review the financial documents required for an SME loan application with a financial advisor or an accountant.