Here are some useful tips on borrowing money. Borrowing money is one of the most common sources of funding for a small business, but obtaining a loan isn't always easy. Before you approach your banker for a loan, it is a good idea to understand as much as you can about the factors the bank will evaluate when they consider making you a loan. Let's start by exploring some of the key points your banker will review:

Ability to Repay/Capacity:

The ability to repay must be justified in your loan package. Banks want to see two sources of repayment - cash flow from the business, plus a secondary source such as collateral. In order to analyse the cash flow of the business, the lender will review the business's past financial statements. Generally, banks feel most comfortable dealing with a business that has been in existence for a number of years because they have a financial track record. If the business has consistently made a profit and that profit can cover the payment of additional debt, then it is likely that the loan will be approved. If however, the business has been operating marginally and now has a new opportunity to grow or if that business is a start-up, then it is necessary to prepare a thorough loan package with detailed explanation addressing how the business will be able to repay the loan.

Credit History:

The first thing a bank will determine when a person/business requests a loan is whether their personal and business credit is good. Therefore before you go to the bank, or even start the process of preparing a loan request, you want to make sure your credit is good.

Equity:

Financial institutions want to see a certain amount of equity in a business. Equity can be built up in a business through retained earnings or the injection of cash from either the owner or investors. Most banks want to see that the total liabilities or debt of a business is not more than four times the amount of equity. A business owner usually must put some of her/his own money into the business. The amount an individual must put into the business in order to obtain a loan is dependent on the type of loan, purpose and terms.

Collateral:

Financial institutions are looking for a second source of repayment, which often is collateral. Collateral are those personal and business assets that can be sold to pay back the loan. Every loan program requires at least some collateral to secure a loan. If a potential borrower has no collateral to secure a loan, she/he will require someone to guarantee the loan. Otherwise it may be difficult to obtain a loan.

When you want to borrow money you must be prepared to answer these questions:

Can the business repay the loan?
Can you repay the loan if the business fails?
Does the business collect its bills?
Does the business control its inventory?
Does the business pay its bills?
Does the business control expenses?
Does the business have a profitable operating history?
Are sales growing?

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