slhecmj.info

Banks and other lenders are really only concerned about one thing; getting repaid.After all, that is how they still make the bulk of their revenue; making loans and getting repaid both interest and principal.Thus, to qualify for a business loan, you simply have to demonstrate that your business can service the loan request – meaning being able to make the loan payments for the life of the loan.Most lenders will perform the following 3 analysis calculations to determine if your business has the cash flow to service the proposed new loan.1) Spread The Financials:Banks / lenders will require three years of past financial statements at a minimum. The reason is to see if your business could have serviced the loan over the last three years. If it passes this test, then your business should be able to service the loan for the next three years.Thus, they use your past business performance to determine what your future performance should be.To spread your financial, most lenders will do the following for each past period that your business provided financial statements:
Take your net income (that is your net profits after all operating costs, taxes and interest payments).
Add back any non-cash accounting items like depreciation (deprecation is not an ongoing cash expenses but an accounting anomaly to reduce taxable income for tax reporting purposes only).
Add back any one-time charges or expenses – expenses that are not expected to reoccur in the future.
Then subtract out the interest charges for the proposed loan – only the interest portion at this stage as interest payments are considered regular business expenses.
This results in the true net positive (hopefully positive) cash flow of the business – cash flow that will be used to pay the principal portion of the business loan.Now, if your business’s cash flow at this point can cover the principal portion of the loan, you have almost pasted this test.Most lenders will not just want to see if your business’s cash flow meets the minimum principal portion of the proposed loan but would like it to cover 25% or even 50% more. The reason is that should your business have a slow period and revenues decline by say 25% or 50% – your business’s cash flow would still be sufficient to make the loan payment.Example: Your business requests a $100,000 loan for three years with a monthly payment of $3,227 – broken down as interest of $449 and principal of $2,778.Therefore, your monthly cash flow should not only cover the $2,778 in principal but say 1.25 times more or $3,473.Also, keep in mind that this cash flow figure should not only cover the proposed loan’s principal but the principal payments of all the business loans the company has.Principal payments are not income statement items and are not accounted for based on normal operating income and expenses but are balance sheet items and are paid out of net income (after all operating expenses).Interest charges from loans are an operating expense and accounted for when the financials are spread.Financials could be spread monthly, quarterly or even annually – depending on the types of financial statements requested or the policies of the lending institution.If you can past this test via your past business performance, then it is highly expected that your business will do the same in the near future.2) What If Scenarios:Here, the lender will perform a series of “what if” scenarios on your financial statements.For example, they may take your total revenue per period and reduce it by 10% or 20% – keeping all other items (your expenses) the same.Then, spread those numbers again to see if your business could still service the proposed loan – e.g. still have the cash flow to make the payments.Again, reassuring the bank or lender that your business would still be able to repay them should your business hit a slow period.3) Debt-to-Equity Ratio:Lastly, while your business may be able to service the proposed loan’s payments, banks also want to ensure that your business is not over leveraged – meaning that your business does not have too much debt in comparison to its equity.Let’s say that the entire market declines or crashes and your revenues fall so low that you are forced to shut down the business. In this situation, would you still be able to repay all your lenders – including this proposed loan?Thus, lenders look to a safety measure known as the debt-to-equity ratio.Measuring your debt-to-equity is simply taking your Total Liabilities and dividing them by your company’s total equity.The higher this ratio, the more risk the business has as it is relying on too much outside debt financing.A ratio over 3 (meaning that the business has three times the debt as it does equity) is too much risk for most lenders to feel comfortable with.Most businesses will have a debt-to-equity ratio between 1.5 to 2 and are considered safe to their prospective lender.Now, if your business does not pass all these tests with flying colors and you still need a small business loan to grow, then it is up to you (the business owner) to manage your company in such a way to bring your business in line with these tests.It all starts with your understanding of your business and the measures it has to pass to qualify.

Okay, so you are high on the clouds! You have a great business idea and you just want to get on with that. You have a business name, you have the intellectual force, management plan, you have everything. Well, almost everything. You don’t have the required funds. There is this major hurdle – raising funds. New business loans can channelize your business initiative in the right direction.New business loans are a huge responsibility. A proper new business loans is fundamental to starting a business and ensuring its expansion. Raising money for new business will not be possible without proper information and preparation. The most common source of new business loans funding comes under banks and credit unions. There is no need to believe that new business loans are harder to procure.Prepare written proposal especially if you are looking for new business loans. Approval of business loans considerably depend on how well a proposal is written by you. You would not find new business loans if you falter in your presentation. Every lender will be looking for repayment when he is making a decision about extending new business loans. A written proposal will contain general information and details about financial status.Business name, name of proprietors, with their social security numbers will constitute the general information. Details about the new business loan, the amount required, its purpose and usage will be imperative. Also, mention the nature of new business you are trying to venture in. Provide some information about your education, experience, skills and achievements. Your personal financial statements and of partners will be required. Don’t forget to give details about the collateral you are offering.New business loans proposal will be practically incomplete without business projections. Business projections will include details about how positive cash flow will be achieved. Give information in the profit and loss figures explaining income and expense. Provide concrete examples, easily identifiable from industry standards. Write in a way that can be described with industry standards and which is easily understandable.New business loans can be either long term or short term depending on your financial demands. Short term loans will have a loan term up to one year. On the other hand, long term loans have loan term ranging from 1-7 years. This term can extend to 25 years in case you are applying for equipment and real estate new business loans. Entrepreneurs can get start up business loans ranging from £15,000-£250,000. Some lenders may be willing to offer more as new business loans. However, you should be able to prove that you will be able to repay it.An important consideration of new business loans lenders is credit ratings. Credit history and credit score is the single most significant criteria that helps the lender to decide whether to provide the borrower with the loan or not. Many people are practically unaware of their credit score or whether they have a credit score or not. Three major credit scoring agencies – Experian, Trans Union, Equifax – will enable you to find your credit score. Check your credit report carefully and see if there are any mistakes or changes. They can be easily corrected if you happen to inform the credit reporting agency. Credit score above 620 is considered good credit. Anything below will start having problems finding credit on their terms. Below 540 is considered bad credit. New business loans are available for bad credit borrowers. But, only few borrowers are willing to work with them and will come with the drawback of higher interest rates.When starting new business, dedication and passion are not enough. You will find that finances are something without which your skills and efforts will not be suitably translated. New business loans can provide you with the finance that you want and get you the success that you deserve.