Getting a Loan: Factors to Consider

by : Michael Laleye

In some cases, you need to borrow capital to start your business. But borrowing money from banks and other credit institutions can be a difficult undertaking so it is important to look at the different factors that can affect the status of your application. Here are some of the most common factors you need to look into:

1. Equity investments- the creditors will want to know the amount of money you have already invested in your business. This is important because having equity investments will enable you to prove that your business has substantial assets to operate without interruptions. The equity investments will also be used to determine the ratio between the debt of the business and the worth of the business so that the creditor will be able to know the maximum amount he can lend to the business.

Having equity investments will also provide the business with the financial resiliency so that it can survive despite weak economic conditions. If you have only a minimal amount of investments in your own business, then the creditors will be likewise more hesitant to loan you with a large amount of cash for your business operations.

2. Earning requirements- another factor that should be considered when you want to take a loan to expand your business is the current income that is being generated by the business. You should note that the financial obligations of the business should be paid in cash so creditors do not really care that much about the profitability of your business in the long term.

They just want to get paid in cash as when the amount is due. So if your cash inflow is lower than the outflow for a long period of time, you can expect that the creditors will not lend you the money you need right now. As you can see, it is not only the management of the business that is important in this case, you should also be able to manage your cash properly to remain liquid.

3. Working capital- this is defined as the excess of assets against the liabilities. The current asset is the easiest kind of asset to be liquidated so if you have a high amount of working capital, you will be able to pay off the debts of the company quite easily. For the creditor, the working capital of a business is a consideration they need to look into because this is the reflection of the company's ability to pay its debts in the short term.

4. Collateral- in some cases, a creditor might require the company to provide collateral to be able to avail of the business loan. The collateral can come in the form of a business asset or a personal asset.