When you apply for a small business loan, you must convince the lender that you will be able to repay the loan. This is accomplished by creating realistic financial estimates for your cash flow patterns. The cash flows would show how and when you will be able to repay the loan.
What is a Bank Loan?
A bank loan is a loan provided and financed by a bank. This distinguishes bank loans from non-bank loans, which are made by lenders other than banks (such as peer-to-peer lending platforms). Banks make personal loans to private persons and business loans to businesses.
The Importance of a Bank Loan to Business
Here are some of the advantages:
- Flexibility of use: Business owners can apply for short- or long-term financing. It relies on their changing business needs.
- Convenient and easy: Obtaining a business loan is simple. It takes minimal time, therefore business activities are not affected.
- Reasonable interest rates: Most lenders provide cheap interest rates on business loans. It’s due to increased competition. As a result, borrowers will no longer face huge repayments.
- You are not compelled to share earnings with your lenders. Borrowers just need to repay the agreed-upon principal and interest amounts.
- Business loan borrowers do not need collateral to raise funds and maintain their business.
- Working capital support: Business loans can be used to supplement working capital amid a liquidity crisis.
- Several loan options: The majority of lenders provide a variety of business lending plans. Term loans, company loans, machinery loans, and other similar schemes are available.
- Tax benefits: Interest on a company loan is mainly tax deductible.
- Quick Disbursement: Business loans frequently require minimal documentation. Thus, they can be distributed swiftly.
- Acquiring such loans improves your business credit and cash flow. Here are some advantages of business loans.
How To Secure A Bank Loan For Your Business
Here are the four things you need to get your loan:
1. Income and Expenditure Statement
First, make estimations of your income and expenditure.
How do you expect your income to rise month after month?
What direct expenses would be incurred while obtaining that income?
What “fixed” establishment costs, such as rent, staff salaries, council taxes, interest, and plant and machinery depreciation, must be incurred on a monthly basis?
After how many months will your income begin to exceed your expenses, which include both direct costs and fixed establishment?
What are the net losses or earnings for each month?
You begin the estimate procedure by travelling into the field and gathering the necessary information. You estimate your income and expenses based on the facts you have and the type of marketing setup you intend to use.
2. Working Capital Statement
The estimations for working capital are then presented.
How much cash would you need to cover your day-to-day expenses?
If you run a manufacturing or retail outlet firm, you will need to keep inventories. What level of inventory would need to be kept?
If you sell on credit, you are likely to have delinquent consumer debts at all times. How much would these be?
You would also typically have to make advance payments and deposits. What would this total be?
In the case of manufacturing enterprises, inventories may include raw materials, semi-finished items on the shop floor, or unsold finished products in the warehouse. The remaining two would have to be valued in order to determine the amount of cash trapped inside.
You’d note that you’d need to set aside cash for all of the above. For example, cash payouts would occur in all forms of inventories, and delinquent invoices would have been cash if credit had not been granted. Part of this could be financed by credit that you can obtain, such as for material inventory purchases.
Formal methods make it easier to calculate working capital requirements. You might seek the assistance of a professional accountant to help you gather the necessary information and develop a working capital estimate.
3. Cash Flow Statement
The cash flow statement shows the cash impact of all corporate transactions. You begin with the opening balance of cash (and bank) at the beginning of the period. Include any cash receipts. Cash receipts might include cash income, collections from credit customers, cash you bring in as business capital, and loans from various sources.
The closing cash (and bank) balance at the end of the period is calculated by subtracting cash payments from the total of opening cash and cash receipts. Cash payments could include company expenses (excluding non-cash expenditures such as depreciation), cash purchases (of assets such as machinery or consumables such as raw materials), credit supplier payments, business drafts, or loan repayments.
The Cash Flow Statement is normally created in a standard style, displaying simply the net impact of receipts and payments for items such as income, expenditure, and working capital. You will most likely require the assistance of a professional accountant to compile it.
4. Balance Sheet
Finally, we get to the balance sheets.
A Balance Sheet is a business’s statement of affairs. It is drawn up as of a specific date.
The Statement of Affairs details the business’s assets, liabilities, and owner equity. Owners’ equity is the difference between assets and liabilities. If assets surpass liabilities, equity is positive. Otherwise, it’s zero or negative.
The Balance Sheet shows the various assets you purchase for the firm at their cost (less depreciation allocated to Income & Expenditure). Your borrowings and supplier credit are classified as liabilities. The amount you invested as capital (plus any earnings not withdrawn from the business) is represented as equity. Business losses and any cash withdrawals you make from the business are deducted from the equity.
Again, you might need the assistance of an accountant. Balance sheets use common forms. The Income and Expenditure, Working Capital, and Cash Flow statements all have an impact on the Balance Sheet. These could get fairly complex, and an accountant is best suited to handle them.