To create a business, a professional needs money. Most often, it is a bank loan that is sought to finance this creation. The bank loan is a financing solution widely used by entrepreneurs. Most of the time, a well-structured professional project, with coherence and pragmatism, will obtain bank financing. Conversely, an unbalanced project with a poorly executed business plan will convince no one.
The elements to consider before applying for a bank loan
One of the main missions of a bank is to finance economic activity by investing in businesses. However, being a business itself, it aims to make a profit and hence seeks to limit risks while increasing its profitability. Banks are therefore very cautious in their analyses of potential risks. You can start from the basic idea that a bank, in general, will not want to risk more money in a project than the creator. This reason partially justifies the observation that some entrepreneurial creation projects face difficulties in obtaining bank financing. Most often, they are:
- Projects with a poorly balanced financing plan;
- Projects deemed too risky;
- Projects conceived by a creator lacking necessary experience;
- Projects that do not have sufficient equity;
- Projects whose product/service does not meet market needs.
Of course, each bank sets its own criteria to refuse or grant its support to a company.
What are the elements that can help you obtain a loan?
Having a minimum contribution
In most cases, you are advised to achieve a balance between equity and borrowing (50% each). However, your bank may agree to reduce its equity requirements to 70%-30% when it considers that the business presents a limited risk (this status may vary depending on the sector). There is one constant, however: if you do not have equity, this may be a difficult obstacle to overcome, regardless of the bank.
Do not hesitate to put banks in competition
It is absolutely essential to compare offers from several banks, as the conditions can vary greatly from one bank to another (repayment duration, overall interest rate, application fees, insurance, etc.). This competition among banking agencies will allow you to obtain better conditions and avoid certain disappointments.
The loan is granted if…
A loan agreement, regardless of the project and the bank, always has concrete reasons arising from the business plan, but not only. A business plan is systematically built on assumptions, on forecasts. Therefore, there is necessarily an unknown element in any file. This is why your business plan must be particularly precise and realistic, especially regarding your working capital requirements (BFR). You must rely on tangible elements (orders, quotes, etc.).
Diversify your sources of financing
Most banking institutions wish to share the risk of financing a business, especially when the amount is high. It is often necessary to find alternative resources to finance a project. Examples include:
- Obtaining a personal loan to increase your equity;
- Turning to a pool of banks for collective financing, etc.
What if the loan is refused?
Facing a refusal can be difficult morally, but it should not be seen as definitive. This should prompt you to revisit your work over and over again. A bank will justify its refusal with supporting arguments. After the refusal, we advise you to consult a consulting firm or support organization, which will allow you to analyze your financial assumptions and assess the viability of your project. Finally, remember that more and more companies are using crowdfunding to launch their business. This could be a fallback solution.
What are the terms of a bank loan?
In the case of starting a business, bank loans granted to a company are generally for a duration of between 2 and 7 years. If a real estate acquisition is included, it can be longer (15 years and more). In most cases, banks granting a loan prioritize financing durable goods (machinery, computer equipment, vehicles, etc.). They will be less willing to accept financing dedicated to working capital requirements.
What are the mistakes to avoid during the negotiation of your bank loan?
It is crucial not to underestimate the amount you need for your project. Indeed, entrepreneurs have the unfortunate habit of underestimating their needs to limit their debt. The second mistake to avoid is to act hastily. A business project must be carefully crafted, thought through, and prepared. Your business plan must be complete and precise. It is only at this price that you will be able to obtain your financing. Starting your own business can represent the adventure of a lifetime. However, this type of project must be carefully considered and prepared to avoid disappointment. We hope that our article has helped you with your project.
