HOW TO GET A LOAN FOR A NEW BUSINESS
When establishing a new business – or even within the first two years of launching your business – it’s far more difficult to obtain finance (than if you were an existing business) as you don’t have a backbone or proof of success. In this article, we outline the steps that will help you get a loan for a new business.
- The first question is, how much do you need? You’ll need to have a clear profit and loss forecast and a cash flow forecast in place for the next 3-5 years. That way, you’ll be able to work backwards to establish how much funding you need to get you through. You’ll need to know how much shortfall there is going to be within the first five years. We cover this in detail in the online course, Business Foundations.
- The next step is to write a business plan. It will need to be both high-level and detailed overview of the current position and trajectory of your business. Discover How to Write a Business Plan here.
- As a new business, you will have no financial track record of how you spend your money. So you’re going to have to prove your value in your personal life. How are you finances? Is your bank statement and personal cash flow all over the place? Start proving that you can manage your own money so that lenders can trust that you can efficiently manage their money too.
- Do you have an asset base to fall back on? That may include a home.
- If you are really passionate about your business you’ll be able to come up with a whole lot of funding YOURSELF. You can sell clothing, cars, jewellery, toys, furniture or your home.
- Get a second job and put that ENTIRE income aside. Remembering that a lender will be more inclined to help someone who has invested in their business already with their own funds, you’ll have to be creative and find ways to make money before anyone will loan you money. As a business investor myself, self-fundraising is the first thing I look for. It illustrates that the borrower has creativity, problem solving skills and the tenacity to make their business survive.
- Get an business partner who can invest equity into the business. At the end of the financial year, you both split the profits (after everyone else is paid) depending on the shareholding in the business. While having a partner helps you raise initial funding, it also helps you to bring an individual on board with a skill set you may not have. If you have an idea, it’s easy to find a partner – there are plenty of people who want to run business who don’t have an idea. Everything I do is in a partnership because it allows me to scale.
- Get an investor on board, who is not working in the business. If you value your business at 150k, Uncle Jeremiah might be an investor and you will provide him with a dividend.Once you reach a financial target that you had initially agreed upon, then you can purchase back the shares from him at an agreed market value.
- Seek a private debt lender. Aunty Ethel may loan you 100k, however, being that you’re a new business, you’re also risky business. Therefore, she’ll want a high interest return which will be appropriate to the risk level. The better you can demonstrate how secure the loan will be, the lower you can negotiate the interest rate. Either way, the rate is likely to be a lot higher than any bank term deposit or almost any other investment. You can see how that puts pressure on the business and may or may not be ideal for you.
In summary, find out how much you’re going to need with a cash flow forecast, sell some assets, get a second job and only THEN will you get a lender on board.