Why All Small Businesses Should Take Bank Loans

Why All Small Businesses Should Take Bank Loans – Published 13 Nov 2012, Business Times 

by Jonas Wulff Moller

All businesses have a shelf life, especially small businesses due to manager importance and the business is only viable with the owner’s knowledge, effort and financing. Manager importance makes small businesses hard to understand for a potential third party. 

Many small businesses do not have detailed financial data or undergo auditing because the transactional costs of getting such information outweigh the benefits. Thus they will find themselves unprepared and lacking financial sufficiency when met with one of these three inevitable scenarios:

1) Need for greater capital than its own cash flow

2) An opportunity to welcome an angel investor

3) Sale, partial sale or merger to a strategic player

Most small businesses fund their operations, capital expenditures, etc with equity, own generated cash flows or interest free loans. By taking a bank loan, the banks will assess your company like any external stakeholder and making information on your financial sufficiency transparent. 

How to get a bank loan for small business?

Identify an industry bank that understands your business; that specialize in specific types of SME 

financing. The banks will require information like:

  • Detailed due diligence of shareholders and top management
  • Credit analysis
  • External audit
  • Information of major clients

The average approval process for term loan can take 10 months and the banks require a personal  guarantee and value the loan as inventory at 50%-80% of the cost value and receivables ratio that is very industry specific. Banks require a personal guarantee as they may suspect some small business owners to mix personal expenses with business expenses and to avoid constant audit, the bank would allow such a mix by getting a personal guarantee.

Adding interest-bearing cost to expenses creates a more natural situation which is always included in a feasibility study by external stakeholders. 

The processes the banks take to evaluate your business for a loan will be the same as what an objective investor would require. It also helps business owners to be continuously prepared when faced with one of the three scenarios and also enable them to objectively evaluate their own business continuously.

Filed Under: Accounting Practices

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