Bank Loans: A Reliable Source for an Upcoming Business
Sourcing funds for an upcoming business is one of the most challenging hurdles an entrepreneur will face. It becomes necessary to carefully study and understand each funding outlet's benefits and flaws, calculate how much funds are needed, and apply them judiciously.
With investment capital firms and angel investors gaining wider recognition, large numbers of entrepreneurs are not aware that major financial institutions like banks are also a viable source of financing for an upcoming business. Loans from the bank are usually relatively fast and easy to approach. They are a quick means of generating funds, with a stipulated time frame attached. They can be interest-only or capital repayment, and can be designed to meet your business needs, long term or short term depending on the reasons behind the loan. Companies aiming to purchase commercial mortgages or business premises have greater chances of accessing loans and usually get flexible terms.
Bank loans are allocated at a particular cost. Five cost principles should be considered: agreement fees, interest rates, professional expertise, insurance and compliance costs. Agreement costs are administrative charges paid to the bank, and vary depending on the business's complexity, size and risk factor. The interest varies depending on the risk of default, and is usually fixed or variable. When the loan is secured, it is easier to obtain better rates, as the risk to the lender is low.
Banks are satisfied with the business model, the capacity to pay back the loans, estimated returns, the management expertise and other provided security. Asset-backed loans are awarded regarding the market value of a property, and banks can lend as high as 70% of its surveyed market value with a time frame of about 7-15 years. A business can also get term loans to purchase equipment and machinery, and capital loans to give credit to clients or stock inventory.
Before approaching a banker, set up a pitch that clarifies the business plan, the promoter's background, the revenue model, estimated sales, profit and growth rate. Return on investment is an essential condition for both banks and investors. Compile the data in a presentable format first.
The benefits compared with an investment capital investor: investors anticipate 5-10 times return on their initial investment, while banks don't desire any equity dilution and the return rate of the bank is already fixed at 13-17%. Banks are comfortable to reach regardless of your location, they have an organized system for handling funding requests, which is quicker than that of an angel investor, and the losses or benefits will be yours alone.