Using Loans to Finance Your Business

So you have a business idea you think is worth pursuing, how will you fund it? Accessing funding to start or grow a business can be challenging if you don’t already have the money to do so. Here are some options to consider when seeking financing for your business idea.

Personal funding

If you are in the position to fund your business from savings or investments, this is great.  It is the easiest form of funding as it requires only your input.  However, it can also be risky as you may overextend yourself and put you and your family at risk of financial disaster. The majority of business people, however, are not able to fund themselves  and will need to find other sources of funding.

Family

Family members are usually the next easiest source of getting funding and it usually just requires you convincing them that they are making a good investment . The acquisition of funds from your family members will save you both time and money, as you will not have to go through the hassle of  providing any form of collateral or background checks.  The risk associated with this type of loan is family disagreements if the business goes bad or they may want to have control over what goes on in the business.  Be careful to lay all your cards on the table so that your family member understands the risks involved.

Financial Institutions

Some entrepreneurs are fortunate enough to acquire funds from their personal finances or from family members. However, the reality is that most entrepreneurs will have to rely on formal lending organizations to secure loans and these come with a lot more requirements for documentation.  It can be a very daunting process, but if you can secure the relevant documentation you stand a good chance of receiving a loan. You will need to produce a business plan with financial projections indicating what kind of cash flows you will be expecting from the business. Your business needs to be registered and most institutions now ask for audited financials in the case of existing businesses and a valid Tax Compliance Certificate. You may also need a letter of good standing from the Companies Office.

Important Facts

  • Credit reports may be sought by lending institutions, both personal and business, so it is always a good idea to review yours before applying for any loan.
  • Some financial institutions are now requiring Income Tax returns for the past three years as part of the documentation you submit with your application
  • Bank Statements may also be required to show how you have handled your finances over the past year.
  • Collateral requirements vary depending on the lending institution and the higher the perceived risk the higher the demand for collateral.  A strong business plan and financial statement can reduce the amount of collateral required for your loan.
  • Business loans will require you to have all your legal documents for your business. These include your Articles of Incorporation, Business licenses and  any contract with third parties, including Franchise agreements and Commercial lease agreements.

Possible Questions That You May Be Asked

Although loan forms may vary, they all require the same basic information from you so be prepared to answer questions as to:

  • Why are you applying for the loan?
  • How will the money be used?
  • Do you have any other debts? To whom?
  • Who are your partners and what are their backgrounds?

Before sinking large sums of cash into any business it is advisable that you first establish who your potential customer is, are they willing to purchase your product or service and at what price.

Share with us how you financed your business, what worked for you and what didn’t.